The 50% Tax Rate

Kennyboy66

Pennywise wrote: »

Have to agree that high taxes are just political gesturing and do nothing to bring in more tax.



The thing is that once you've got someone whose earnings are well above average, or who has assets well above the average person, a lot of their income, spending, investments, etc will be discretionary. With that comes a lot of scope of changing behaviour. I'm not meaning dodgy tax planning schemes or tax evasion. I'm meaning simple things, like working less hard, to earn less money, or putting more money into tax-efficient savings, or planning purchase and sales of investments over several years to take advantage of each year's rates/allowances, etc. They only need to do this when tax rates reach beyond what the person regards as acceptable. When you get high rates, perception is that they're not acceptable and people's behaviour changes to avoid them, often meaning that HMRC get nothing whereas otherwise with a lower tax rate, they'd have got maybe 20-30%!

I always find this area interesting as it impacts on human behaviour, however to say that higher tax rates are just political gesturing is a little disingenous.

VAT @ 20% will raise a huge amount more than VAT @ 15%.
Stamp duty @ 3% above raise a significant amount even despite the daft jump in rate above £250k.

In addition, people will avoid/evade tax at any rate. The record number of artificial self employed schemes set up when UK tax rates where at a post war low should speak volumes.

As it happens, I think the top rate of tax should be around 40% but there are far greater disincentives in the tax and benefit system that would be better addressed first.

For the life of me, I never understand why tax relief is so generous to higher earners. We have a situation in this country where approx 1/2 the working poulation has no private pension whatsoever. The other 1/2 (made up of 6 million government workers and people who are higher rate taxpayers or in decent company schemes) have comparably great provision.

Do we need to spend £7-8 billion a year bribing higher rate tax payers to save in a pension ?

The main problem with this country is that we want Scandanavian levels of health & education and social provision & USA levels of taxation.

dtsazza

olly300 wrote: »

Your argument ignores the fact that some jobs are more useful to society than others.

The money that someone earns comes from the sales of their output. If person A earns twice as much as person B, it's because ceteris paribus what person A has created sells for twice as much as person B's output.

And prices are a voting system to allocate scarce resources; if people are prepared to pay twice as much for A, it's because they value it twice as much as B.

Ultimately then, the output of those workers is judged by society as a whole (consumers), who decide what the relative value of those outputs are, and price them accordingly.

So in a real sense, the more profitable job is the one that most effectively gives people what they're willing to pay for, i.e. what they want. And so is contributing to society. (This even works for classical counterexamples like the millionaire footballer, even though it seems unlikely initially).

For example compare a headteacher of a secondary school to a city lawyer who deals with company takeovers.

Who would you say work would benefit society more in the long run?

Actually, although there's meant to be an obvious answer, I don't think it's clear at all. What is the headteacher actually doing - how much benefit are people getting from his actions compared to, say, a cardboard cut-out? I think it's feasible that a headmaster might generate almost zero benefit (not a knock at any specific headmasters, of course). Teachers are obviously more important in that regard as they're on the front lines, but again their contribution will vary wildly - and unfortunately their pay does not reflect this. Teachers in private schools are a little better, in that people are then in a position to pay for their services, but this is still indirect (you pay for the school, not the particular teacher) and distorted by the state school teacher being available for nothing. Perhaps private personal tutors would be the purest example (there's still some pollution there) - how much do good ones get paid an hour?

And the lawyer may in fact bring huge benefits to society. If he successfully negotiates a merger which allows a big company to bring economies of scale to bear, this could have small impacts on a lot of people. Let's say that as a result of his actions, everything in Tesco became a few percent cheaper; that's broadly equivalent to making everyone in the country 1% better off (which is a huge impact for one person when multiplied by 65 million).

The benefits system unfortunately due to it's design is such that if you are at the lowest pay level you actually can lose out in income by going out to work.

I agree, which is why it is quite simply broken.

BTW our current tax system has so many loopholes that it's easy for private firms who have high salary earners to work out ways of getting round them.

If that is the case, then it would be more accurate to make an argument for closing loopholes.

(That said I don't think it will be fully possible, because cash is supremely fungible. Trying to charge different amounts for different situations is very difficult when you can synthesize an almost infinite number of different situations which are financially equivalent due to the same underlying cashflows. In that regard I don't think it will ever be possible to successfully close loopholes, and it's partly why from a pseudo-philosophical viewpoint I think it's difficult to justify progressive tax rates rather than a flat percentage.)

Kennyboy66

Pennywise wrote: »

Not to mention that the children of stay at home parents seem more likely to do better at school, less likely to get into trouble, etc., so there are actually potential social benefits of having a stay at home parent, which is good for society. With joint taxation of "households", the parents could decide on what they wanted to do, given their relative ability to get good jobs, and not be penalised for wanting to look after their own kids!

An absurd generalisation. Depends on a whole host of factors, single parent, income level, education of parent, whether the parents work full or part time - and most importantly when the primary carer returns to work.
The main summary of 69 studies since 1960 concluded that on average there was no decrease in educational attainment or increase in behavioural problems for children where the mother returned to work within 3 years of the birth.

There was however negative effects for "middle & upper class" children whose mums returned to work.

shop-to-drop

Kennyboy66 wrote: »

An absurd generalisation. Depends on a whole host of factors, single parent, income level, education of parent, whether the parents work full or part time - and most importantly when the primary carer returns to work.
The main summary of 69 studies since 1960 concluded that on average there was no decrease in educational attainment or increase in behavioural problems for children where the mother returned to work within 3 years of the birth.

There was however negative effects for "middle & upper class" children whose mums returned to work.

I take it Pennywise was referring to "middle and upperclass" where one parent is a higher earner, not lower income families where family would be reliant on benefits if both parents aren't working.

Kennyboy66

shop-to-drop wrote: »

I take it Pennywise was referring to "middle and upperclass" where one parent is a higher earner, not lower income families where family would be reliant on benefits if both parents aren't working.

I'm not sure - what we do know is that "middle class" tax breaks are like "whack a mole".

We have barely get rid of one (University tuition fees) and the clamour for the next one pops up.

If we want to 'encourage' women to stay at home and look after the kids, we could stop all the subsidies that already exist for childcare, or we could have a tax allowance attached to each child upto a certain number / age.

What we emphatically don't need is the joint taxation of households. It would be an extremely poorly targeted change. The biggest beneficiaries would be wealthly pensioners / childless couples.

RJP33

dtsazza wrote: »

True - the only real benefit to increasing tax rates is the greater income, with every other effect being negative. So if the rate isn't bringing in any more money, then it's a universally unappealing proposition.

(Of course it's impossible to prove exactly how much would be brought in under different tax rates, and I'm sure you could prove it either way depending on what set of reasonable assumptions you decide to use for your calculations.)

It can / is often just a popular political gesture without any benefit to the country.

You can look at other countries to model roughly how different rates would affect takings. Lower tax often increases takings, investments and jobs.

mr_fishbulb

dtsazza wrote: »

True - the only real benefit to increasing tax rates is the greater income, with every other effect being negative. So if the rate isn't bringing in any more money, then it's a universally unappealing proposition.

The is also the benefit to the political party that backs it because they will get the support of "Yeah! Stick it to the posh people!" voters.

mr_fishbulb

funguy wrote: »

They should have a flat rate tax of between 15-20% for all earnings. Apparently this would bring in more money overall as people are encouraged to earn much more. Im sure i read somewhere that they did this in Hong Kong in the past and it increased the national wealth immensely!

Plus it would cut down on all the overheads of calculating tax on different bands and allowances.

RJP33

mr_fishbulb wrote: »

Plus it would cut down on all the overheads of calculating tax on different bands and allowances.

Worked in the tax office, you woudln't believe the overhead costs of maintaining all these different taxes.

Le_Chuck

dawyldthing wrote: »

by the time you add National Insurance on it works out at 31% for lower bands, 51% for middle and 61% for higher. I do believe everyone should be taxed fair but if i had to pay 61% between the two I don't think i'd be looking to get that sort of job as like someone said there will be a reason why they get paid that much (generally talking, unless there something related to the government.......

you do realise there is an upper limit on NI? No one pays more than 50% tax (tax & NI) on their total income