Thursday, 4 July 2013

Here we go again...

The Thought Gang left a comment on Bright Idea Of The Day:

Paying public sector workers net is a very stupid idea indeed.

The cost of applying the PAYE/NIC system is small. It works the same for all employers, so all the computer systems can handle it, everyone who works in a payroll/finance/HR department understands it, and everyone at HMRC is entirely familiar with it.(1)

PAYE is actually a really good system for all those with a simple single source of income.(2) It only breaks down when we get into multiple income sources and wotnot.. and this suggestion would make that worse!(3)

The costs of developing a completely new way of doing things for the state sector would vastly outweigh what it currently costs.(4)

You cannot just reduce all salaries to their current net and leave it at that.(5) For one thing, you have to review and revise all salaries every time there's a change in the tax system.. which would only work by referencing back to a notional gross salary...(6) thus meaning that all we're doing is finding a new and more convoluted way to do the calculations we do now. Then there are huge knock-on effects to benefits,(7) pension contributions(8) and god-knows what else.(9)

Remember, please, that 'the public sector' is not one big thing with one bank account and structure. It's many thousands of organisations of varying sizes. Some are unambiguously part of the state, others are not.. as funding streams and lines of control vary.(10)

It's a 'proposal' I hear often... but it's so simplistic and short-sighted that not even today's politicians are dumb enough to give it any thought.(11)

1) The admin costs might be small, but the admin costs of paying out a net-of-tax salary are even smaller.

2) Agreed. But paying out a single net-of-tax figure is even better.

3) No it wouldn't, why would it? If people have multiple sources of income and gains, it will be taxed at lots of different rates with all sorts of different allowances. So people with multiple sources of income will have fewer complications when preparing their tax returns. And under a flat tax system, it just doesn't make any difference anyway.

4) There would be modest cost savings on the administration front, but that is only a small part of the benefit/the reason from shifting to paying net-of-tax salaries.

5) Yes you can. You just do it.

6) That's the whole point and I explained that in the original post - you wouldn't have to. If a public sector employee were paid £20,000 net-of-tax (i.e. tax free) instead of £25,000 with £5,000 withheld at source, then whatever happens to income tax/NIC rates, he continues to get £20,000 net-of-tax/tax free. Simple and honest.

7) What benefits, pray tell? Car allowance? Travel allowance? What has that got to do with anything?

8) The same logic applies to pensions. Instead of being paid £25,000 gross with a promise of a taxable final salary pension of x% of that, you are paid £20,000 net-of-tax/tax free with the promise of a net-of-tax/tax free final salary pension of y% of that, whereby y% would be slightly higher than x% for low- and average paid public sector workers.

9) Go on, what else?

10) Agreed, we have to draw a line somewhere - and this exercise would be very useful in actually tracking down who and what is actually public sector and who and what is faux private company. True public sector workers won't mind in the slightest and all the leeches who run stuff like the Work Programme will be spitting feathers.

11) It's not "simplistic", it is the current system which is unnecessarily hyper-complicated and opaque - which is what the politicians love about it - they can shuffle a lot of their employment income into private companies, unlike yer front line public sector worker who has to take the full tax on the chin. Paying out net-of-tax/tax free salaries is a highly sophisticated and transparent system.


The Thought Gang said...

In the interests of brevity and the need to do some work, I'll respond to a few points.

First, let me be clear that I make no defence of the current convoluted system of taxation and benefits. This isn't about how one might do this if we had better rules, it's about how one does this in the current world.


For tax purposes we add multiple sources of income together and apply the standard rates and allowances to the whole. If some of the income is already deemed paid net then we have to gross it back up.. and then do all the calculations that we would have done anyway.

Re. 5/6

So you think that public sector workers should be immune from changes in the tax rates? That might be 'simple and honest' for them.. but what about the rest of us? It's hugely discriminatory. If income tax goes up then my net pay goes down. Why should it be different for the folks who work for the council?

Re. 7

I meant state benefits. Anything that makes reference to gross earnings would have to be adapted to enable reference to public sector earnings, both in whole and in part.

Re. 8

Or, we treat all pensions the same. Whether they are public or private, whether they are DB or DC, we tax the recipient upon what the recipient receives... instead of bothering ourselves with who it came from (something that will often become somewhat opaque over time).

My comment, mind, was more concerned with contributions.. these are subject to tax reliefs/credits which, for DC schemes, are very important. Adapting the rules to make it work under this proposal is possible, of course, but it's one more complication.. one more set of rules that we don't currently need because everyone is paid gross and taxed thereon.

Re. 11

There are many problems with the current system. But deducting PAYE at source is not one of them. I applaud your calls for fundamental reform of this unholy mess.. all this does is get rid of a bit of circular funding that's not actually a problem (compare it to, say, VAT.. where some public sector bodies are not able to reclaim input VAT, and thus spend half their lives trying to find clever ways to avoid paying it.. thus the state enriches the accounting and legal professions in efforts to avoid paying money to itself.)

Usually this blog champions universal and efficient taxation/benefits. This is the opposite of that. This is pulling 8 million people *out* of a universal system.

Have you considered people doing part-time variable-hour work? How do you work out what their new 'net' pay is when their effective tax rate under the current system varies wildly from month to month?

Then state finances need to be completely rewritten as the treasure no longer gives departments all the money that will no longer come back.. and that has to run all the way down the chain. (In fairness, that's a one off that sounds like an exercise well worth doing in any case.. but it sure-as-shit swallows up many years worth of whatever small efficiency savings you think we're getting)

Mark Wadsworth said...


Re 3, I'm a chartered tax advisor, I know all this stuff better than most. Some sources of income is tax free anyway (like income from an ISA, redundancy pay) and the system can cope with that perfectly well.

Re 5/6, when I'm in charge, income tax will be significantly reduced with a view to phasing it out. So we can give pay rises to public sector workers we like and no pay rises to those that we don't like.

Re 7, when I'm in charge, all state benefits will be replaced with flat rate Citizen's Income.

Re 8, you're missing the point, contributions towards a tax-free pension would be x% of tax-free salary with no tax relief, instead of x% of taxable salary with tax relief, it all comes to exactly the same thing.

Re 11, good points re VAT, the worst tax of all.

"Have you considered people doing part-time variable-hour work? How do you work out what their new 'net' pay is when their effective tax rate under the current system varies wildly from month to month?"

Easy peasy. The new net pay is £x per hour worked, end of discussion. Most public sector people do not have wildly variable hours anyway.

This is not primarily about efficiency savings, they are relatively small (although worth having).

Bayard said...

This idea would be unpopular for another reason. If a civil servant goes to the bank to arrange a mortgage, they are not able to borrow as much money as someone on the same effective salary in the private sector, because the banks use the gross figure, which in the private sector case will include an amount for pension contributions. While this may be doing them a favour in the long run, many don't see it that way. If the civil servant's gross salary didn't include tax and NI either, this "problem" would be a lot worse.

"So you think that public sector workers should be immune from changes in the tax rates? That might be 'simple and honest' for them.. but what about the rest of us? It's hugely discriminatory. If income tax goes up then my net pay goes down. Why should it be different for the folks who work for the council? "

I can see that this should apply only to those employed by the government direct, i.e. civil servants, but what is it to you what civil servants earn (unless you are one of course)? The governmet will not raise so much extra revenue if it puts taxes up under this system, but they can always reduce the pay of civil servants accordingly and save an equal amount of money that way.

The Thought Gang said...

Thanks. Whilst I think I may always be opposed to a two-tier system*, the idea at least becomes workable as part of a much wider set of reforms. But as I said, my view pertains to the world as it is. And you're not in charge.

Your ideas don't simplify the system by reforming PAYE, they enable reform of PAYE by simplifying the system. It's a far more sophisticated discussion than the simple 'why does the govt bother to tax public sector workers?' line that Mr City AM gave us.

(* I think you need a really simple system to do it, but the more you simplify the system, the less reason there is to treat public and private differently (i.e. the cost of that circular funding falls). Given that treating them differently does cause some issues with people comparing roles and will have strong political opposition (well reasoned or not), I'm not sure there will ever be enough benefits to make it worthwhile)

Mark Wadsworth said...

B, if banks are that stupid, then hey, that gets reckless lending down a bit. When i'm in charge, nobody will need a salary of more than 2x main salary (to pay for the bricks and mortar).

And we are not going to put income tax up, that;s the whole point - we will lock in high effective rates of tax for fat cats and reduce them for everybody else (or give the front line people pay rises).

TG, until we've phased out income tax entirely - and replaced it with LVT - the only way to be able to pay employees tax free is by having a flat turnover tax, to which i am strongly opposed, as that is the worst kind of tax and closer inspection the most arbitrary.

Lola said...

Small point. I know for a fact that the Financial Ombudsman Shambles employs a lot of its staff through personal service companies. Apparently so it can get round employment and redundancy law. When we're in charge that's something else we'll have to tackle to make this work.