Monday, 8 April 2013
On Marginal Tax Rates
Much of the discussion, as one would expect, is around who wins and who loses and indeed who got the worst deal and who the best.
(Incidentally, I watched a very dispiriting programme at 10am on the BBC yesterday in which an entire army of lefties insisted we should simply redistribute all wealth communist style as all 'earned' wealth had been stolen - the couple of game sane people in the room Nicki Campbell allowed to be shouted down at all times. Owne Jones is getting far too much airtime for his raving communist schtick).
Anyhow, apart from my whimsy, I am puzzled by the way in which certain tax cuts and such are discussed. For example, the lowering of the 40p tax band is rigthly described as a rise, whilst the increase in the tax free allowance is a cut. This much I can follow.
But Grant Thornton have been peddling some PR line about the terrible effects of marginal rates on tax on the poor. It describes that due to reductions in tax credits and other beenfits, people will suffers 73% rates of tax on their earnings.
My point is that this just is not the case. In the example of people earning say £42,000, they now have to pay more tax over to the taxman. For someone earning £15,000, they don't pay anymore more tax. What happens to them is that their welfare gift from the State is reduced as they earn more. They don't pay more over, they just receive less unearned income from taxpayers. I agree that the net effect feels the same and will be disincentive to work harder for limited rewards - but it is not a marginal tax rate. A tax rate implies that earning more will cost you more in tax. This is not the case with low earners. They don't pay more tax as a result of the reforms, indeed low earners are the recipients under this Government of a hug tax break as the personal limit has been upped considerably in 3 years. What they are feeling now is the attempt to reduce susbisdy for their wages as they earn more.
This grates becuase it misses a fundamental point over who is really paying tax and who is not. In this sense it is directly related to the ridiculous concept of a bedroom tax, which is another conflation led by the left of a welfare reduction being described as a tax when it is no such thing.
The points may seem pedantic etimology; yet their effect is high, they lead people to think the Government is raising taxes on them when it is doing no such thing. If all cuts to any welfare budgets or spending get described in future as tax rises then we have truly entered a parallel, and confused, world.