Who pays too much/too little tax? ...Inspired (?!) by Jon the Hat

[ADK]

Care to explain?

[Guest MattP]

50% tax on earnings over 20K would lead to the rich paying more tax than they do now wouldn't it?

He means 50% on the amount after I presume.

[Captain...]

50% tax on earnings over 20K would lead to the rich paying more tax than they do now wouldn't it?

It would eventually, I think, based on SAB's figures only happen when you are earning more than 120k, which by that point you are fairly comfortable.

The figures were kinda pulled out the air, but nobody should have an issue earning 20k tax free, and I don't care if the super rich say nearly half in tax, they should do.

He means 50% on the amount after I presume.

Yup 20k tax free, on the rest 50% goes to the state.

[Guest MattP]

Yup 20k tax free, on the rest 50% goes to the state.

It's a good idea in theory (even though I still think 50% on top is far to much) but it doesn't create much incentive.

It does leave itself open to abuse though, if I did that I'd be paying myself a salary of £19,999 and then shifting all sorts of money about everywhere rather than pay 50% on it.

[ADK]

It dosn't add up though.

You are giving everyone earning less than £120K a tax cut, with a small increase for those earning over £120K.

Just dosn't add up.

You would have to make it more like 60% and then that would lower the break-even point and might take enough money off those above to be able to afford the tax cut for the majority.

[Guest MattP]

It certainly does seem unaffordable to take everyone earning under £20k completely out of the tax system and to be having those on around 30k only paying 5k a year.

[MooseBreath]

Throwing around arbitrary numbers like 50% on 20k plus is pretty meaningless. A certain amount of money is required and that number should be central to any proposal.

[Jon the Hat]

But this is not the problem, the problem is people setting themselves up as companies paying business tax and taking a salary of 15k and paying little income tax, then getting a tax free dividend at the end of the year. Using off shore bank accounts to avoid paying tax, if everyone played fair it would lower the tax amount for all, or, first of all, help drag this country out of a crippling spiral of debt and deficit.

Perhaps you could explain how you get a tax free dividend? Most people who work through a company pay corporation tax on their profits, then income tax on any salary and income tax on the dividends.

[Captain...]

It certainly does seem unaffordable to take everyone earning under £20k completely out of the tax system and to be having those on around 30k only paying 5k a year.

Well my second point was that the problem is not really the complexity of the tax system, but the people that exploit it.

But going back to my hypothetical figures, they would need to be massaged a bit before finding the correct amount, but as previously mentioned not all tax recieved is from income tax, you increase the amount of money people will have then they will spend more and a lot more will be generated in VAT, especially for lower earners, which is why VAT is grossly unfair on the lower earners, they pay a lot more relatively in VAT then rich folk.

[ADK]

I thought VAT was a flat tax on spending. How do poor people pay more VAT relatively?

[Steven]

I think the one thing that all people should be able to agree on whatever their political persuasion is and that is that it's far too complex.

If tax experts can't understand it, if it needs court cases to interpret the system then there's something fundamentally wrong and at odds with a democratic society.

[Captain...]

Perhaps you could explain how you get a tax free dividend? Most people who work through a company pay corporation tax on their profits, then income tax on any salary and income tax on the dividends.

Well if you are self employed and sole director of a small business, then when you pay yourself a dividend, you do pay tax on a dividend of 10% it, but you receive a tax credit for the 10% as you have already paid business tax on it, so effectively you are paying tax on your dividend, but then claiming it back, this is only really relevant to the individual if they are self employed and set up as a limited company, but it is effectively tax free.

Explains more here: http://www.contracteye.co.uk/dividends_tax_pay.shtml

But I got a little lost when it started talking about the higher brackets of tax.

[Captain...]

I thought VAT was a flat tax on spending. How do poor people pay more VAT relatively?

Because they spend more of their income proportionally.

You only have 10K disposable income a year after tax you are going to spend nearly all of it on commodities, lets say all at 20%, for ease, then you have paid 20% of your disposable income in tax.

Now if you have 100k disposable income a year after tax, then you are very lucky, but you are not going to spend all of that on food and clothes, you will probably save some, invest some, and spend lets say half, 50K at 20% VAT that is 10k, or 10% of disposable income.

A simplified explanation, some more detailed facts and figures: http://www.savethech...not_go_up_1.pdf

[breadandcheese]

Well if you are self employed and sole director of a small business, then when you pay yourself a dividend, you do pay tax on a dividend of 10% it, but you receive a tax credit for the 10% as you have already paid business tax on it, so effectively you are paying tax on your dividend, but then claiming it back, this is only really relevant to the individual if they are self employed and set up as a limited company, but it is effectively tax free.

Explains more here: http://www.contracte...s_tax_pay.shtml

But I got a little lost when it started talking about the higher brackets of tax.

I'm sure there's a qualified accountant on here, but the basic premise of dividend tax is so the person in your example doesn't pay twice. If a small business with sole director makes a profit, it pays 20% corporation tax on that profit. Whatever's left, the shareholder is allowed to take as a dividend. If a basic rate tax payer business owner then took a dividend, without the tax credit and adjusting rate, he/she would effectively be paying a 40% tax rate (20% corporation tax, 20% income tax), even though the total profits may fall into the basic rate tax threshold. This is why there is the adjustment.

I have always thought that the tax saving for those business ownerss being paid in dividends rather than salary has been through not having to pay NI on the dividends.

[Alf Bentley]

If only it stopped at direct taxation! You then pay tax of some descripton when you come to spend most of your disposable income VAT, Road tax, fuel duty, customes and excise duty, insurance tax, aiport tax, stamp duty and so on and so on.

But the individual has the choice whether or not to buy most of those goods and services (maybe not VAT on clothes or insurance & stamp duty if a home owner) - and without those tax revenues, government would either have to increase other taxes or cut public services...

(1) Now, the only sensible quesion here is why on earth would you have a 32% rate and a 42% rate and a 52% rate?

(2) This should also replace all tax credits, with the exception of a child benefit of an appropriate level.

(3) The result of punitive taxes is a further increase in salary levels to properly reward in-demand skills and services, which ultimately falls on the companies which employ higher earners. This is inflationary, and means that the cost of goods and services goes up, roles move abroad to avoid it, and the overall tax take is tiny.

(4) We need to stop arguing about the people paying tax and start holding the government to account for the fact that it is spending 50% of GDP on public services.

(5) Government is spending your money on things you don't want and don't need. Wouldn't you rather have that in your pocket to choose how to spend?

(1) Because it allows individual members of society to contribute to the fabric of that society according to their means, while allowing them ample personal income, as I've demonstrated.

(2) Might be feasible via PAYE / annual self-assessment, but could create a lag between time of need (often involving children) and time of payment...plus complications re. tax assessment of individuals or couples?

(3) Usual phony excuses of those wanting more than their share! The taxes would have to be a lot more punitive (or the people extraordinarily greedy) for large numbers to leave the country, their family, friends, culture etc. You argue that the tax take is tiny...yet go on (below) to argue that the top 10% pay 57.6% of income tax! You want to have your cake and eat it!

(4) Fine, but while Labour increased public spending as a % of GDP (correctly, in my view), the high rate at the moment is due to stagnant GDP (crisis) and increased Tory spending on unemployment. I'd challenge not the (temporary) increase in public spending but how it is being used - put people to work building houses & infrastructure, as per Roosevelt's New Deal, boost demand/GDP, reduce unemployment, provide much needed goods/services....and then cut spending/raise taxes once the economy is getting healthier, as Keynes correctly suggested in the 1930s (and Labour didn't do in office, to be fair - they should've raised taxes more!)

(5) Nobody will ever be happy with everything the government spends our cash on - that's what politics/democracy is for (in theory). But, no, I'd rather the government (in consultation with qualified specialists) spent money on most things that I need but know little about. Am I supposed to decide on school buildings, hospital equipment, submarines, state pension schemes?

Well those who earn more can afford to pay more tax, its that simple really. Your opinion is going to vary depending on whether you want to champion the individual or collective society.

Absolutely! Though I'd add that you can calibrate the tax system to allow plenty of individual freedom while protecting a healthy collective society....indeed, individual freedom almost requires a healthy collective society - I assume that even Jon the Hat needed some public services as a child, and might do so again if he fell ill, lost his job/business or lives to an old age...

And guess what, they do pay more tax, and they would pay more tax with a flat rate! It is called a percentage, and it is very clever like that. Did you know that the top 1% of earners pay 27.7% of total income tax? The next 4% pay 19.3%, and the next 5% pay 10.6%. In Summary that is the top 10% of earners paying 57.6% of all income tax.

I thought the rich had all left the country because of the punitive taxes, yet they're still here paying all this tax! Amazing! What would the flat rate be? Too high and it really would be punitive, to rich and poor; too low and you'd be talking about massive public spending cuts (at a time of economic crisis, with an ageing population) - and chaos as people got used to arranging their own education, healthcare etc. Either way, compared to the current situation, it would be a massive redistribution of wealth from the state (as the representative of all the population) to the richest section of that population.

I assume Jersey and Monaco would implode.

Flippant comment, but serious point...Why do major economic powers put up with the drain on their resources from tax havens? They certainly have the economic/political power to address this, but do little. Is it because they mainly represent big business, not the people?!

[Guest]

i would love to hear the justification for anyone to pay a higher percentage of their income on income tax. Putting aside for a moment the need for a tax free threshold to ensure the low paid can afford to live, which is just a fact, and the misalignment of the tax thresholds with the NI ones. We bascially have four tax buckets.

1) Not taxed

2) Taxed at 32% (20% + 12% NI)

3) Taxed at 42% (40% + 2% NI)

4) Taxed at 52%/47% (depending on when / if the top rate actually changes)

Now, the only sensible quesion here is why on earth would you have a 32% rate and a 42% rate and a 52% rate? If you need to make people on lower incomes better off, you increase the tax free threshold. This is very fair because if directly favours those on the lowest incomes, incentivises work over benefits, and means you dont have complexity. This should also replace all tax credits, with the exception of a child benefit of an appropriate level.

The only reason then to have a higher percentage, is the idea of a progressive tax rate which increases the tax burden on the higer paid. The common justification for this is the one SAB used above, which is the minimum wage vs Richard Branson approach. We have already solved that problem with the increase in the tax free threshold. Everyone paying tax can afford that tax, which means that any further incremental tax in addition to the flat rate is punative. The result of punative taxes is a further increase in salary levels to properly reward in-demand skills and services, which ultimately falls on the companies which employ higher earners. This is inflationary, and means that the cost of goods and services goes up, and the burden of this inflation falls on the lowest paid who spend a greater proportion of their disposable income on essentials.

The main blocker to any tax reform is exactly the nonsense when is spouted in response to the top rate tax band. There is no justification for this band, Employers have to pay even higher salaries to complensate for it, roles move abroad to avoid it, and the overall tax take is tiny. Yet try to take it away and you are accused of ignoring the poor and favouring the rich. This is a serious problem, becuase it means the sensible discussion is clouded out, and we end up with silly workarounds when what we need is an massive simplication. We need to stop arguing about the people paying tax and start holding the government to account for the fact that it is spending 50% of GDP on public services. No one asked for this, and in the main people cannot even see how much tax they are really paying. Wake up and smell the coffee - government is spending your money on things you don't want and don't need. Wouldn't you rather have that in your pocket to choose how to spend?

In theory I don't disagree with your idea. However the basic tax threshold would need to be moved considerably higher. What if we put it upto 35K (an amount the well off seem to think is nothing) or 50K but then we increase the single tax percentage above this threshold so that the govt. still brings in the same revenue. What sort of percentage would that need to be and do you think the high earners would be happy to do this?

[Captain...]

Flippant comment, but serious point...Why do major economic powers put up with the drain on their resources from tax havens? They certainly have the economic/political power to address this, but do little. Is it because they mainly represent big business, not the people?!

It is a very serious point, the biggest one being that the UK own a large number of these tax havens and have the jurisdiction and the power to close their tax haven status, but don't. is that because it adds money and therefore power to the commonwealth? OR is it because they themselves use them?

[Guest]

If we are widening the discussion, this is indeed where those with higher disposable income pay a lot more tax.

Please explain further - those with a lower disposable income pay a much higher percentage of their income on flat rate taxes like VAT surely?

[MooseBreath]

I get the feeling sir Alf is one of those people who doesn't quite get the concept of incentives, and thinks that extremely hard working high earners will simply carry on working themselves to the bone even if you take away all of their money in tax

[MooseBreath]

Please explain further - those with a lower disposable income pay a much higher percentage of their income on flat rate taxes like VAT surely?

Depends what they buy. Most necessities are vat exempt, so they'll only pay a higher proportion of vat if they're spending a higher proportion of their salary on 'luxuries'

[Guest]

I get the feeling sir Alf is one of those people who doesn't quite get the concept of incentives, and thinks that extremely hard working high earners will simply carry on working themselves to the bone even if you take away all of their money in tax

Or maybe never having been in the situation you don't understand that those on higher incomes will still be earning more just paying a little extra more for the government (which has helped them into the position) to improve things further.

[Guest]

Depends what they buy. Most necessities are vat exempt, so they'll only pay a higher proportion of vat if they're spending a higher proportion of their salary on 'luxuries'

Should people who work a full week for a low income be unable to buy those things that are not VAT exempt - in your opinion?

I can understand your stance on people who don't work but would like clarity on those that do work (and do shitty boring jobs possibly) for a low income.

[Guest MattP]

I get the feeling sir Alf is one of those people who doesn't quite get the concept of incentives, and thinks that extremely hard working high earners will simply carry on working themselves to the bone even if you take away all of their money in tax

Not sure if Alf is but the point at the end certainly stands.

[Guest]

Nobody has suggested taking 100% in tax at any level.

And if they want to work less - allowing others to share their jobs I'm sure that would be okay too.

[Captain...]

Depends what they buy. Most necessities are vat exempt, so they'll only pay a higher proportion of vat if they're spending a higher proportion of their salary on 'luxuries'

That depends on what you call luxuries, like most tax laws VAT is confusing, the classic example being the Jaffa Cake, which is not a biscuit and so is VAT exempt, although clearly a luxury, whereas other things you might deem necessities are taxed, such as clothes, tooth paste etc.

And making fruit tax exempt, it affects Barry's bananas as well as Porche's pomegranates.