low paid, pensioners, savings and tax

bigadaj

The problem is that the unclear way in which teh tax system works actually seems to be effective in terms of people's perception, clawbacks aren't seen as being as significant as a simple higher rate.

Personally I can't see why the system is so complex, make reasonable provision for tax effieicnetly savings and pension provision for people on average earnings, as this will relieve pressure on the benefits system, and so save the government money. Overly generous tax breaks for the rich aren't effective in this regard so such breaks should only be targeted at riskier and higher growth or value areas, as evidenced by the eis and vct schemes.

We do seem to be moving slowly to such a system, sorting out the annual and lifetime allowances on pensions for example, and the allowance of higher rate tax relief on pension provision now looks under possible threat.

epicurate

bigadaj wrote: »

The problem is that the unclear way in which teh tax system works actually seems to be effective in terms of people's perception, clawbacks aren't seen as being as significant as a simple higher rate.

Is this just going to be one of those times when all I can do is rail against humanity's lack of logic? It drives me nuts that politicians do this, and then it makes me even more mad when people accept it! It's like when they started limiting the amount of paracetamol you could buy in one go. I thought "That's ridiculous, as if that's going to stop anyone who wants to commit suicide, you'd just go to two chemists, and in the meantime the great majority are inconvenienced." Then the suicide rate from overdose fell precipitously. Hey ho!

bowlhead99

zagfles wrote: »

The reason for its design isn't some inherant logic in why people in some circumstances should have higher marginal rates than people in other circumstances.

But there is some logic and I explained what it was:

If you have family income of 25k we give you a tax credit when you have a child, because it is quite hard to cover the expenses of a new baby when you do not have a large disposable income. A big proportion of your income is going on accommodation and utilities and basic foods and essential travel and the disposable income is small. You would struggle to provide for the child while you paid the same fixed amount of tax as a couple on 30k who did not have the baby.

As we do not wish to discourage people having babies, we offer a tax break to the low income members of society who have babies. They get a lower marginal tax rate than the couple without the baby, and can therefore afford the baby essentials on top of the other essentials like housing and utilities and bread. It avoids potential hardship.

The couple without the baby would like to be able to access that lower tax rate but accept they can't because they don't qualify. They are not trying to buy baby essentials on top of the other essentials like housing and utilities and bread, and are less hard up, and less hard up people can stand higher tax rates.

However, if you have family income of 80k, the costs of having a baby are a much smaller proportion of your disposable income. The 30k family were netting 26k and for argument's sake, maybe spending 16k of it on 'essentials' and so only had 10k disposable for discretionary expenditure and baby costs. The 80k family has 60k take-home and so after the same 16k 'essentials' has 44k disposable for discretionary expenditure and baby costs. Someone with 44k disposable income does not need a few pounds a week 'family allowance' or whatever you want to call it.

Consequently, the family on 80k needs to give back whatever break they would have got at 30k because we don't think they need it.

However, I don't have children at all. Myself and partner did not need a tax break at 30k but my friends with kids did. So I had a higher personal marginal rate than them, which I accepted, between 30k and 60k when they had their break. However, now we are all on 80k with our 44k disposable income - them using it to run their household quite affordably, me also running mine quite affordably with fewer children and more wine - they are not getting a special government deal any more.

The consequence of them having had a lower marginal rate before, and falling behind me in what tax they were paying at 59k income, means that they will pay more tax per pound earned on the way to 80k income. At 80k we pay the same tax, because neither of us get a break for buying nappies, because at that income you can afford nappies quite easily and still not be in hardship and they do not need special protection.

So, that is an example of people having different marginal rates in different circumstances. If everybody had the exact same rates regardless of circumstances, you could not help out people in certain circumstances that needed the help.

Sure, you could keep headline rates the same and give some people a kickback on the side, for their circumstances. However, paying 10k tax to the government and receiving 1k back on the side from the government, is paying 9k. If I did not receive the kickback I would just pay the 10k. I pay more net cash to the government per pound earned. If we determine that by the time we are both paying 50k to the government, my friend should not get his 1k kickback, then he will get a lower effective takehome per pound earned while getting there.

And someone like you would say "this is all very disingenous, we have simple headline rates but when you look under the hood there seems to be a variety of marginal rates experienced by individuals at different income levels". Which is where we are now.

What is the top income tax rate? Look at the HMRC site, you'll see it's 45%. Look under the covers, you'll see it's 60%. Look deeper, adding in NI, employer NI, tax credits withdrawal rates, child ben clawback, and you get much higher marginal rates, over 100% in some cases.

It's designed to present an image rather than reality. It's designed to look good rather than function well. It's like a used car with immaculate paintwork but with a dodgy engine.

The challenge to government (ignoring party politics - it's the same challenge for all of them) is to market to the general population the concept of people giving money to the government that they would have been able to spend on themselves if they had not given it to the government.

Making this palatable is not easy. Of course you have to use language that presents an image that exudes fairness and does not appear complicated. Under the hood, to deliver the fairness you need some complication. As how else can different benefits be given to people with different circumstances other than giving kickbacks and clawbacks on the side which would be administratively no easier and would be derided as stealth tax and stealth tax reversals?

On 125k a year I'm a high income earner and happy not to get the first 10k a year tax-free. I still don't want to pay over 40% on new income if I get a pay rise to 130k.

At 75k a year I wanted to get the first 10k free just like I did at 65k, 55k and 45k. I still don't want to pay over 40% on new income if I get a pay rise to 80k

Unfortunately to reconcile those two positions, I am going to have to pay over 40% at some point between 75k and 125k. We could get me to the same place by making me pay 60% between 100k and 120k (as today) or perhaps a wide expensive band 50% between 80k and 120k (no thanks) or perhaps a tight superexpensive band of 97% between 100k and 107k (no thanks).

I think your problem is with the marketing, how this is 'dressed up' for public consumption. For argument's sake, lets say we are agreed that a high income couple should not get the child tax credit but it's OK if they're poor.

If you go to market and say working families earning 60k pay 60% tax and city boys earning 70k pay 40%, it will not go down well. If you say a couple on 35k with kids they chose to have, pay 18% while a responsible couple on 33k trying to saving up to have kids, pay 20%, that will not go down well either.

So the simplest thing to do is to say that everyone on 33k or 35k is "on" 20% and everyone on 60k or 70k (or 100k or 110k or 130k, for that matter) is "on" 40%, but there are some other allowances that may or may not be available depending on status.

Sure if you look under the hood you find there are complexities. And complexities are easier to exploit by people with the time or the intelligence or the cash to find them. The fact that some groups' circumstances mean they might miss out, is a shame, as the people who are time- or cash- or intelligence-poor are the ones that might find the opportunities to save tax, most useful. Is it the role of government to publicise how best you can avoid their tax?

The alternative of "simple flat rates for all" does not cater for individual circumstances. You need to be able to claim some breaks. In the U.S., the tax tables are quite straightforward but everyone fills out a tax return to claim all their personal deductables to get their rebate annually, and the 100+ page instructions for the main form will put you to sleep before you find the references for the other forms that explain what other breaks you haven't thought of.

talexuser

Very interesting reading with great points on both sides. I do wonder if part of the problem is jumping from a 20% to a doubling in one go at some arbitrary figure?

If income tax and employee NI was merged (as it really should be) and the progressive system was more progressive, lets say jumps of 5% in the new total (IC + NI) tax, so the pain was less obvious at each step re incentives, would it really be that much more complicated to administer than what we have now?

And you could still perhaps have socially justified breaks eg children benefits for low earners without getting big jumps in marginal rates, maybe just extending the next jump a little higher?

Just wondering if that could design a smoother transition for higher taxation for higher income.

Oldbiggles

This post was started by “Crisp” who was confused by the Chancellors “Abolishing the 10% starting rate of tax on savings income”
Unfortunately, not many people even knew it existed, but in any case, the new rules don’t come into effect until April 2015, and then anyone with a total income of less than £15,500 pa. will not pay any tax on their savings in the 2015/16 tax year, but only if they register as a non tax payer with their bank/building society.
The current rules are that your taxable earnings must not be more than your personal allowance plus the 10% tax rate band.
Frankly the procedure is so complicated and the interest rates on savings so low that it puts people off from claiming, and I can understand why.

ColdIron

talexuser wrote: »

If income tax and employee NI was merged (as it really should be)

While superficially attractive and I would instinctively support it, there are problems with this. Not everybody who pays income tax pays NICs and it would penalise pensioners, people that receive interest on savings and dividends on investments. I am no fan of NI but simply merging them is not the answer

zagfles

bowlhead99 wrote: »

But there is some logic and I explained what it was:

If you have family income of 25k we give you a tax credit when you have a child, because it is quite hard to cover the expenses of a new baby when you do not have a large disposable income. A big proportion of your income is going on accommodation and utilities and basic foods and essential travel and the disposable income is small. You would struggle to provide for the child while you paid the same fixed amount of tax as a couple on 30k who did not have the baby.

As we do not wish to discourage people having babies, we offer a tax break to the low income members of society who have babies. They get a lower marginal tax rate than the couple without the baby, and can therefore afford the baby essentials on top of the other essentials like housing and utilities and bread. It avoids potential hardship.

This is wrong. Families have a higher marginal rate, not a lower one. Support to families is not via the tax system, it's not via lower tax rates (as it is in most other EU countries) it's via payable benefits which generally have income related withdrawal rates, which add to income tax.

Making this palatable is not easy. Of course you have to use language that presents an image that exudes fairness and does not appear complicated. Under the hood, to deliver the fairness you need some complication. As how else can different benefits be given to people with different circumstances other than giving kickbacks and clawbacks on the side which would be administratively no easier and would be derided as stealth tax and stealth tax reversals?

It's trivially easy. We already have a mechanism to take money off people as their income increases. It's called income tax. So why do we need lots of other mechanisms to take money off people as income increases?

Simply give everyone a citizen's income which is based on circumstances (family, disabilities, housing, age, residence, but not income). Basically give everyone what someone in their circumstances on out of work benefits gets.

Then set a flat tax rate with no personal allowance at whatever rate is fiscally neutral. Simply incorporate benefit/allowance withdrawal rates into income tax.

Marginal rates identical for everyone. Everyone gets enough to live on, everyone is incentivised to increase their income. No means testing.

You may need to make the CI conditional on working or seeking work for those of working age who are capable of work, but with far lower marginal rates you may not need to.

But it obviously won't happen. Tax rates would have to rise. And people generally are too dim to understand that higher headline tax rates don't necessarily mean you're worse off. Which is why successive govts have been obsessed with lowering tax rates, which means we get all these daft anomalies.

ColdIron

zagfles wrote: »

Simply give everyone a citizen's income which is based on circumstances (family, disabilities, housing, age, residence, but not income)

Sounds perilously close to Marxism to me, sorry I'm not buying it

zagfles

ColdIron wrote: »

Sounds perilously close to Marxism to me, sorry I'm not buying it

:rotfl:Then you really haven't understood it. The system is no different to what we have now - except benefit withdrawal is incorpated into tax and withdrawal rates evened out.

Do you think Switzerland is a hotbed of Marxism? Because they're seriously considering it. http://www.bbc.co.uk/news/business-25415501

epicurate

talexuser wrote: »

Very interesting reading with great points on both sides. I do wonder if part of the problem is jumping from a 20% to a doubling in one go at some arbitrary figure?

Another example of how the tax system fools us all. For employees, at the same point as your income tax goes from 20 to 40, your NICs go from 12 to 2! So the net jump is really only 10%, but I'll bet most basic rate taxpayers don't realise that marginal NICs plummet for the well paid.

Personally, I'm in favour of merging income tax and NICs and getting rid of employer NICs. The distinction between employee and self-employed taxation (and, more importantly, NICification) creates too much distorted and artificial behaviour.

I love how the idea of any tax increase for a group is described as "penalising". (1) it really isn't. (2) If we want to help pensioners, I would happily support a significantly increased personal allowance (that doesn't get clawed back!) for retirees. Simple and (crucially) transparent. As it is, the system is utterly labyrinthine, which makes for poor levels of public understanding, and bad quality public debate.