To update my post of March 2010, subject to a few simplifying assumptions, here's an overview of how the main rates of tax on income, output and profits interact.
There are three income tax rates (20%, 40% and 50%); three main rates of Employee's/self-employed National Insurance (8%, 12% and 2%); one main rate of Employer's National Insurance (13.8%); one Tax Credit withdrawal rate (41%); and a mainstream corporation tax rate of 27% (I've ignored small company rate 20% or marginal rate of 28.75%) and VAT (which is either nil or 1/6 of turnover).
Thanks to the Lib-Cons continuing Labour's fine work, the simple average of all those marginal rates is up from 48% last year to 52% next year. Yes chaps, that's more than half the value of your output. There are plenty more marginal income tax rates, a few even higher, some of them lower, but this should help give an overall picture (click to enlarge):
Yet again, hands up anybody who thinks it would be more honest, not to say less economically damaging, to have a single, flat rate of income tax?
Obviously, the lower the rate the better, that's a different topic, but the revenue lost (and boost to the economy caused) by reducing the more punitive rates will always be less (and worth more) than the revenue gained (and drag on the economy) caused (and imposed) by increasing the lower rates, so the single flat rate required to replace all those (ignoring LVT for now) would be a lot lower than 52%.
Might As Well Get Them Some Hugo Boss Uniforms, Rowley...
50 minutes ago
16 comments:
The issue with simplification is that the people would like it too much and the scummy gits that have been in government & perpetuated the shite we have now for decades would never again be voted in. Simplification is politically unacceptable to the politicians themselves and as we have absolutely no power to change this short of mass murdering every registered member of the Labour, Tory & Lib parties, we will continue to suffer from stupidly complex tax law which runs to tens of thousands of pages when you could create a system simple enough to fit on one sheet of paper and collect the same NET revenue after admin costs. I really don't see that its going to change, you only have to look at the polls now. Cons in power & suddenly Labour who set about destroying this nation for the past 13 years are the favourites. People seem to have very short memories.
I'm not sure it's entirely fair to compare simple averages in this case.
Never mind the fact that the distribution of tax rates among people is going to be far from uniform, the original article included an extra category (basic rate taxpayer claiming tax credits at 2nd Withdrawal rate) which had a lower average than most of the rest of the table. Excluding the 2nd withdrawal rate from the initial post gives an average of 50.3%, so there is still an increase, but less of one.
The thing that gets me about this is that people think the tax system is ultra fair because it hits the rich so hard. 20%, 40% and 50% seem fairly different, so the people paying 20% can console themselves with the thought that those who earn a lot more are paying a lot more - pure jealousy but it seems to win Labour a lot of votes.
But look at the actual difference in what's being paid. Basic rate taxpayer working for a VATable business pays 50%, higher rate pays 58%, even higher rate pays 65%. Not anywhere near the difference that people believe...
Are you sure about these rates? I pay a little bit of higher rate, my average surely cannot by 58%...
And yes, I do realise that you have put employers' taxes in too! I just don't think my rate is quite that high..!
SW, correct. So why doesn't any party run on a simplification manifesto? Apart from UKIP, of course.
RA, I admit that the simple average might not be representative (most income is basic rate taxpayer), but however we weight these, it is clear that the overall weighted average has gone up by about 4% (2.5% VAT, 2% NIC, 2% WTC withdrawal).
And there is no second WTC withdrawal rate any more, it's all the same rate.
BE, yes of course I'm sure, I spent hours checking them and I do this for a living.
I take it you are higher rate taxpayer, working for VAT-able business = 58%? So here's how I worked out your marginal/top rate:
Customer pays £100 gross
Employer hands over £16.67 VAT to HMRC.
Employer has £83.33 to spend on your salary.
Employer hands over £10.11 Employer's NIC to HMRC.
Employer then pays you £73.22 gross.
Out of £73.22 gross, you pay 40% income tax and 2% Employee's NIC = £30.75
Your net income is then £42.47
Overall tax rate = 58% (start with £100 and get down to £42).
RA, re the second withdrawal rate, why would this make much difference?
Using last year's rates for Employee, VAT-able business, if you had First Withdrawal rate it was 77%, second withdrawal rate 53% and basic rate 48%.
Scrapping the second withdrawal rate and applying the (higher) first withdrawal rate to all WTC instead means that of income previously taxed at 53%, some would be at 77% and most would be at 48% but the overall tax rate must be much the same.
So 50.3% is almost certainly understated on a like-for-like basis.
Ahh, sorry I missed the point about it being the marginal rate. Whoops.
Any chance of the overall rate for a few key income bands??
I'm sure this is a significant understatement because even when you get home with your well-earned 48% you will have taxes to pay. Council tax and fuel duty being pretty much unavoidable if you are holding down a job.
W42, true, but Council Tax and fuel duty aren't taxes on income, as such.
And to be fair, there are personal allowances for income tax and NI (which gets average rate down). The Council Tax and fuel duty you pay is approx 50% times £7,000 personal allowance, so the overall average rate is "about 50%" whichever way you look at it.
B: "Any chance of the overall rate for a few key income bands??"
You'll have to make do with that table. There are in practice more or less infinite bands and rates depending on your mix of sources of income, level of income, age, student loan repayments etc etc. VAT on some things is only 5% and there is a subtle difference between zero-rated and VAT exempt.
Two things:-
1. If you are 'taxed at 50%' you're really taxed at 100%. You earn £1 for you and then you earn £1 for the government.
2. I WISH you wouldn't keep doing these charts - I just about manage to get my head down and do some work when I see this, get all angry and have to go and cool off and rebuild my concentration, again.
L,
1) I told somebody else off for saying that, 50% is 50%. And really VAT isn't 20%, it's 16.67% (of the final selling price).
2) Apol's, but I have to keep my readers well informed (as well as banking this for settling future arguments as to who gained or lost under the Lib Cons - mainly banks as far as I can see).
Hi Mark,
Nice summary. But this can be achieved just buy looking at government revenue (40%) and expenditure as a % of the GDP (50%).
Clearly in the direction of USSR.
Relevant article:
http://sjeltur.nl/us-government-now-spends-more-than-the-soviet-union-ever-did
"You'll have to make do with that table. There are in practice more or less infinite bands and rates depending on your mix of sources of income, level of income, age, student loan repayments etc etc. VAT on some things is only 5% and there is a subtle difference between zero-rated and VAT exempt."
You've pointed out my major problem with the tax/tax credits system again so I have to have a little rant. Although I utilise the national insurance threshold loophole by receiving income from 2 separate employments, its absolute bullshit that:
A) It exists at all (my boss always says its to maintain the illusion that NI is not income tax)
B) Tax credits are calculated on gross income even though net income will wildly fluctuate as you point out meaning that earning a wage from a single full-time employment (widely considered the best type of employment outside of this bullshit loophole i.e. career development) makes you worse off financially than gaining the same gross income via several part-time jobs.
It really gets on my bloody nerves.
Anon, another good point succinctly made.
My point was more that actual effective income tax rates are incredibly haphazard and bear little relation to your level of income - in other words, they might as well replace the whole shooting match with a flat 50% income tax and at least be honest about it. It's the flatness that's important to me, not the absolute rate.
SW: "my boss always says it's to maintain the illusion that NI is not income tax"
Your boss is a very perceptive man, I must say. If only everybody were that thoughtful, we'd be a big step further forwards.
Whoops typo, my comment above should have read: "1) I told somebody else off for saying that, 50% is 100%."
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