Friday, 24 April 2009

Envy is a sin, you know

So, it seems that 68% of the UK thinks the 50p tax rate is a good idea. Actually, I'm quite cheered by that. Given that only 1% of the country will actually pay the tax, this means that 31% of the country is bright enough to realise that just because "other people" will be paying a tax doesn't make it a good thing. This post is therefore directed at the 68%. For the rest, it will some across as simplistic and obvious, which is why I haven't posted it until now.

It is an oft-repeated fact that those of us in the £150k-plus bracket form 1% of the population, yet we contribute 23% of all taxes. What is not so often mentioned is that it was not always so. Before Lawson dropped the top rate of tax from 50% to 40%, the figure for the contribution from the top 1% of earners was 14% of overall taxes. It was after he reduced the rate to 40% that the contribution went up to 23%. So it is not just dry economic theory that says changes in the top rate of tax are counter-intuitive; it is hard direct evidence from this country's own history.

It is not just income tax that shows this effect, either. Lawson also reduced the rate of Stamp Duty, in several stages. When asked at a meeting of Conservative backbenchers to eliminate the Duty entirely, he replied that each time he had reduced Stamp Duty, the tax take had in fact risen as a result of increased dutiable activity. However, he suspected that if he eliminated it entirely then the tax take would probably fall.

This is, of course, not the slightest bit surprising - if you think about it. We quite happily accept that taxes influence people's behaviour in other ways. We increase road tax on fuel-hungry cars and expect people to buy more efficient models in response. Taxes on alcohol and tobacco are levied because we are told that their use causes harm and should be discouraged. We are all braced for a whole panoply of green taxes that are designed, purely and simply, to mould our behaviour in ways that (we are told) will save the planet and hold back the rising tides.

Yet in respect of income tax, we direct a new tax at precisely the people who have control over how much they earn, how they earn it and (crucially) where they earn it, and we expect that the new tax will have no effect on their behaviour. This is not just foolish, it is wilfully foolish.

HT - Stuart Sharpe's post yesterday, which attracted a comment that I felt I had to reply to.


  1. 68% think that this 50% tax rate is a good idea?

    Hmmm. Doesn't sound like good news for those of us who want to see income tax abolished completely. We need to do some work!

    By the way, in your post on Sharpe's Opinion, were you saying that your marginal rate of income tax hit 82% one year?

  2. Yes, it did hit 82%.

    What happened was that I moved house in the same year that we admitted a new partner to the business. So in one year I was hit with:

    - a stamp duty bill on the price of the new house

    - a capital gains tax bill for the profit on the sale of equity in the firm to the new partner, the tax being payable there & then despite the fact that the payments from the new partner were spread over future years

    Add that to the usual income tax and NI, and - hey presto - a marginal rate of 82%.

    Now, of course I was lucky enough that the remaining 18% was enough to live on; that would not be true for many people. And it was a one-off, albeit a painful one-off. However, those that say high earners should pay more usually do not realise that we do pay a lot more!The reason is quite simple; HMRC have their own definition of "income" for business owners, which is different to that which applies for accounting purposes and, unsurprisingly, yields a higher figure. However, I am paid according to the accounting definition - and even that is optimistic as it assumes no late payers, unexpected bad debts, or cashflow problems. So when I have to pay tax on HMRC's definition, the tax rate as a proportion of my cash income is even higher that the headline rate would suggest. Then there are things like CGT and the higher rates of Stamp Duty which only really apply to the transactions that higher earners do, further inflating the effective rate. Typically, something in the 60-65% range is the result.

    People on low salaries assume that the same rules apply to high earners; that you have a monthly payslip from which tax is deducted leaving you with the remainder. But it isn't.

    (Not that I am complaining; after all , I could resign and take an ordinary job if I chose. I just want to pay what is fair)

  3. I have moved house 4 times since 1997. I have paid Mr Brown some £40,000.
    That's £50,000 ADDED to my current mortgage. I had to take a loan, at 5.5%, to pay his tax. That, or still live in my student flat.
    No wonder this country has such levels of debt, and no wonder that the government is desperate to get the housing market moving again.

  4. Brilliant post Mr P. If you are over the 50% threshold you can afford a new tea boy. I make an excellent cuppa.

    I have decided that I am unlikely to be ever able to afford to move again because I will now refuse to borrow at such a high multiple as I did to get my first place. The upshot is that the government is getting no more stamp duty from me... ever.

  5. Thanks Mr Blue - too kind. I did have the funds for a new tea boy, until I heard on Wednesday that my taxes would be going up.

    Equally, I once had the funds to pay a local tradesman to replace the windows on my new house, but then I was hit with a huge stamp duty bill.

    But of course, we must raise taxes in order that the Government can spend money in order to bring us out of recession. Leaving the money in our own pockets to spend as we wish would not work for some reason that I obviously don't understand...

  6. Well, well, well. It seems that even Tony Blair agrees with you!

    What is frightening is that Tony Blair seems to be more sensible that the majority of the population. In fact, it seems that on this issue, he's sounder than a lot of people who are planning to vote Tory.

  7. Yes, I spotted that news report, too.

    Well, if he pops round for dinner to discuss it, I'll be courteous - but I will make sure I have a long spoon ;-)

  8. The 50% rate was greeted by cheering in my workplace - mostly by doctors working for the state most of whom are well into that band.

    It's that bad.