One-off contribution help - so unfair!!

zagfles

greenglide wrote: »

Was it the 70s or 80s when the top rate of tax was 98%? 85% normal income tax plus 13% investment surcharge - reduced from normal 15% to allow some income.

At a certain point income tax becomes effectively an employer tax as the highest paid tend to have a significant input into how much they are paid.

No sympathy from me. There is a level that is simply "too much". I do understand that competition with other countries is an issue but something needs to be done, just "what".

And you have the same problem at the bottom end, where benefit withdrawal rates are sometimes 100%. Even up to an average income, a family with a couple of kids have a tax rate of 73% inc tax credits withdrawal. Which is why we have so many workless households.

UC will make it a bit better but not much.

hyubh

zagfles wrote: »

This stacks against the horrendous problem of trying to annually value and potentially tax a DB pension, which would have to be done if flat rate relief were introduced

Why so horrendous? The AA does exactly that. Notional employer contribution for tax purposes = notional increase in pension value for tax purposes less actual employee contributions. Simples!

big payrise for someone with a few decades in a final salary scheme could result in a large tax bill.

Easy solution for public sector schemes: allow members with final salary links for pre-2014/pre-2015 service to defer their current membership and start afresh with CARE-only service. The remaining private sector DB schemes can do what they like anyhow.

Would people starting eg in a graduate job where they expect to be earning big in 10 years or so be put off making pension savings, after all why "waste" tax relief now when they're only paying basic rate tax when they could save it for when they pay higher rate?

Such people still aren't going to be dependant on the state pension in old age. If they could have been even less dependant than they actually came to be, then more fool them - it doesn't mean taxation policies should revolve around them.

zagfles

hyubh wrote: »

Why so horrendous? The AA does exactly that. Notional employer contribution for tax purposes = notional increase in pension value for tax purposes less actual employee contributions. Simples!

Yes but the AA only affects you if you exceed it with carry forwards etc. So doesn't affect the vast majority.

With flat rate everyone in a DB scheme would need their pension benefit to be valued and taxed, minus whatever the flat rate relief is. People wouldn't know how much tax they'll owe, or be owed, till the end of the tax year or even well after.

Easy solution for public sector schemes: allow members with final salary links for pre-2014/pre-2015 service to defer their current membership and start afresh with CARE-only service.

The govt promised no more changes to public sector pensions for 25 years or something as part of the settlement for the dispute a few years ago.

The remaining private sector DB schemes can do what they like anyhow.

Such people still aren't going to be dependant on the state pension in old age. If they could have been even less dependant than they actually came to be, then more fool them - it doesn't mean taxation policies should revolve around them.

What if they don't ever get the high salary they were expecting? Why shouldn't it revolve around them as much as anyone else?

grey_gym_sock

princeofpounds wrote: »

And if you include VAT, council tax, removal of tax free allowance and child benefit etc. the underlying tax take is far north of 50% - probably nearer 70%.

let's see ... http://www.ons.gov.uk/ons/rel/household-income/the-effects-of-taxes-and-benefits-on-household-income/historical-data--1977-2013-14/summary--historical-data--1977-2013-14.html and look at the first table (table 14) ...

the lowest decile of income had (in 2013-14) a gross income (including benefits) of £9,524; and after all taxes, a net income of £5,234; a tax rate of 45%.

the top decile had £104,779 before tax; and £68,532 after tax; a tax rate of 35%.

the richest decile pays a lower percentage in tax than the poorest decile! i.e. we have a regressive tax system. (income tax is progressive, but other taxes are regressive enough to wipe out that effect.)

and in fact these figures understate the effective income of the wealthiest, because they exclude capital gains (because it technically isn't income), which is much more lightly taxed, and mostly goes to wealthier ppl.

OK, you say, but most of the top decile aren't paying additional rate ... how much do ppl on really high incomes pay?

well, the top decile paid 23% in income tax + employee NI, and 12% in all other taxes. somebody earning £150k would (by my calculation) pay about £60k in income tax + employee NI (assuming it is all employment income - just about any other kind would be taxed more lightly), which is 40% ... other taxes would be a bit less than 12% (since most of them tend to go down, as a %, as income rises), so you'd be looking at less than 52% in total - at most, about 50%?

on salaries over £150k, marginal income tax + employee NI is 47%, so on e.g. £300k, you're paying the average of 40% and 47%, i.e. 43.5%, in income tax + employee NI, and so adding in other taxes (at less than 12%), you're perhaps over 50%, but only just.

on salaries of several million, income tax + employee NI is almost 47%, but other tax will be much less than 12%, so you might be in the mid-50s?

I personally favour a progressive tax rate. But I also think there is something potentially immoral about government taking more than half of somebody's income.

well, total tax appears appears to go only very slightly over 50% for the highest incomes.

but income tax is the main tax that can be progressive, if you want a progressive system.

though one tax that could be made more progressive is council tax. replace it with a land value tax, and it could be progressive.

You have to question at which point you stop being an individual and start becoming a serf of the state.

that is patently ridiculous. the nearest thing you'll find to serfs of the state are ppl being abused by the DWP - arbitrary sanctions, being forced to work for benefits, etc.

and also, with higher effective marginal tax rates:

zagfles wrote: »

And you have the same problem at the bottom end, where benefit withdrawal rates are sometimes 100%. Even up to an average income, a family with a couple of kids have a tax rate of 73% inc tax credits withdrawal. Which is why we have so many workless households.

UC will make it a bit better but not much.

will it? AIUI, the abandoned plan to cut tax credits by increasing the withdrawal rates has not really been abandoned, just postponed, because it's been made part of UC. so at least in that respect, UC will make it worse.

princeofpounds

Hey, super interesting post, worth more discussion but I don't have time to do so just now, so giving it a little bump.

zagfles

grey_gym_sock wrote: »

will it? AIUI, the abandoned plan to cut tax credits by increasing the withdrawal rates has not really been abandoned, just postponed, because it's been made part of UC. so at least in that respect, UC will make it worse.

No it won't. The cuts to tax credits were only partially reflected in UC. In fact almost half the people on tax credits will be better off when they move to UC even after the cuts (according to the IFS).

The key point is that the cuts to tax credits were both a lowering of the threshold, and an increase in the taper rate. The cuts to UC were only the thresholds, not the taper rate, so there's no increase in the marginal rate.

At the bottom end, people who get JSA/ESA/HB/LHA, the current taper rate is 89-100%. Under UC it will be 65%. That's why UC will make it better.

zagfles

grey_gym_sock wrote: »

let's see ... http://www.ons.gov.uk/ons/rel/household-income/the-effects-of-taxes-and-benefits-on-household-income/historical-data--1977-2013-14/summary--historical-data--1977-2013-14.html and look at the first table (table 14) ...

the lowest decile of income had (in 2013-14) a gross income (including benefits) of £9,524; and after all taxes, a net income of £5,234; a tax rate of 45%.

the top decile had £104,779 before tax; and £68,532 after tax; a tax rate of 35%.

the richest decile pays a lower percentage in tax than the poorest decile! i.e. we have a regressive tax system. (income tax is progressive, but other taxes are regressive enough to wipe out that effect.)

The problem with measuring which taxes are supposedly "progressive" and "regressive" is that taxes are almost invariably measured against income. Measuring an income tax against income make sense, but measuring, say, a spending tax against income makes no sense whatsoever. As the IFS have pointed out several times.

The problem is that no account is taken of delayed spending/saving.

Take someone in a stable job who earns £40k every year and spends, say £20k on VAT'able goods, paying £4k VAT. So VAT is 10% of his income.

Take someone else who is self employed with an erratic income. He earns £60k some years, and £20k others. In the years he earns £60k he saves, in the years he earns £20k he spends his savings. So he spends the same at the person in the stable job, so pays £4k a year in VAT.

But if you try to measure VAT against his income, in the years he earns £60k, he only pays 6.67% VAT. In the years he earns £20k, he pays 20% VAT!

So higher income - lower % VAT, lower income, higher % VAT! Makes it look regressive, but it isn't. On average he earns and pays exactly the same VAT as the person in the stable job. VAT is only regressive if you measure it wrong (ie against income not spending).

Excise duties on the other hand are most ceratinly regressive. For instance poorer people smoke more, so they pay more cigarette tax in cash terms and much more in % terms. The amount people use their car doesn't increase linearly with income, so fuel tax is regressive.

So if you want to make tax more progressive, cutting cigarette tax would be the most effective way! Why not suggest it to George

grey_gym_sock

zagfles wrote: »

No it won't. The cuts to tax credits were only partially reflected in UC. In fact almost half the people on tax credits will be better off when they move to UC even after the cuts (according to the IFS).

The key point is that the cuts to tax credits were both a lowering of the threshold, and an increase in the taper rate. The cuts to UC were only the thresholds, not the taper rate, so there's no increase in the marginal rate.

ah, thanks for the info.

At the bottom end, people who get JSA/ESA/HB/LHA, the current taper rate is 89-100%. Under UC it will be 65%. That's why UC will make it better.

though council tax support remains separate, so there will be further tapering for that, in addition to the 65% for UC?

grey_gym_sock

zagfles wrote: »

The problem with measuring which taxes are supposedly "progressive" and "regressive" is that taxes are almost invariably measured against income. Measuring an income tax against income make sense, but measuring, say, a spending tax against income makes no sense whatsoever. As the IFS have pointed out several times.

The problem is that no account is taken of delayed spending/saving.

Take someone in a stable job who earns £40k every year and spends, say £20k on VAT'able goods, paying £4k VAT. So VAT is 10% of his income.

Take someone else who is self employed with an erratic income. He earns £60k some years, and £20k others. In the years he earns £60k he saves, in the years he earns £20k he spends his savings. So he spends the same at the person in the stable job, so pays £4k a year in VAT.

But if you try to measure VAT against his income, in the years he earns £60k, he only pays 6.67% VAT. In the years he earns £20k, he pays 20% VAT!

So higher income - lower % VAT, lower income, higher % VAT! Makes it look regressive, but it isn't. On average he earns and pays exactly the same VAT as the person in the stable job. VAT is only regressive if you measure it wrong (ie against income not spending).

there's a real issue about whether richer/poorer/middling segments of society are paying too much/little tax. it's not something you can prove - different ppl will have different views, even if they agree about the data - but data is relevant.

in some ways it would be more informative to measure the taxes somebody pays over their whole lifetime as a percentage of their earnings over their entire lifetime, instead of for a single year. or perhaps not over a whole lifetime - after all, some ppl are significantly richer or poorer at different stages of their life - but over (say) 5 or 10 years.

i would be interested in any data on those lines. however, the single-year data - if that's all we have - is far from useless.

for a start, most ppl don't have wildly fluctuating incomes. i would imagine it's most common among the self-employed, who are still vastly outnumbered by the employed. and most self-employed ppl in fact have low incomes. the number who are swinging from very high to very low incomes in different years can't be that great. ppl who make more from their own business are more likely to operate through a company, in which case they are probably deliberating smoothing their own taxable income if necessary (when deciding how much salary + dividends to pay themselves each year).

if you followed the IFS line, you'd conclude it was impossible to decide whether rich/poor ppl are paying their fair share of tax. but the reality is that we know that shifting the tax burden away from income and towards VAT and council tax is regressive. the only question is precisely how regressive. i think the data in this table is not a bad way to start to answer it.

(the data also reflects different kinds of income being taxed more heavily than others, generally earned income being taxed more heavily than investment income, which again favours richer ppl.)

the income figures in the table will also tend to understate real incomes for the richer deciles, much more than for the lower deciles, because they leave out things like capital gains, company profits which haven't been paid out yet, and even (for a few ppl) income retained within trusts. so the table will tend to overstate the effective rate of tax paid by wealthier deciles.

Excise duties on the other hand are most ceratinly regressive. For instance poorer people smoke more, so they pay more cigarette tax in cash terms and much more in % terms. The amount people use their car doesn't increase linearly with income, so fuel tax is regressive.

So if you want to make tax more progressive, cutting cigarette tax would be the most effective way! Why not suggest it to George

it's true that the advantages to health of discouraging smoking do need to be weighed against the regressive effects of the tax. i would be inclined at least to end the practice of increasing tax on cigarettes by more than inflation every year.

zagfles

grey_gym_sock wrote: »

ah, thanks for the info.



though council tax support remains separate, so there will be further tapering for that, in addition to the 65% for UC?

Yes, but that applies to both the before and after picture. Before CTB was localised, the taper worked out to 95.5% including CTB IIRC. Rather than the 89% I quoted above for the current taper when over the JSA/ESA/IS hump (HB/LHA plus tax credits taper).

So yes that need taking account of but the marginal rate will be a lot lower for those on low incomes under UC.