Monday 8 April 2013

On Marginal Tax Rates

Apologies for a very pedantic piece on a Monday morning, but someone has to raise it. Today is the first day of the next tax year and so there is some play in the media about the various tax effects of the budget and previous budget as to what all of those who may be due pay some tax may experience in their wage packets.

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.


16 comments:

roym said...

well the govt has been content to allow (enable?) economic illiteracy when its suits their purpose - 'the nation has maxed out its credit card' they can hardly complain now.

I suspect it suits politicians to allow such ignorance - if joe public doesnt have ownership over the issues how can they be part of the solution?

Blue Eyes said...

Repeat after me: A reduction in welfare benefits is a "tax", a reduction in tax rate is "a cheque". A spending reduction is "taking money out of the economy".

The reason this debate is backwards is because as you point out, lots of people think that *all* wealth is stolen by the wealthy from the less wealthy and that the state's job is to even it out.

I suspect that the lefty consensus is out of step with about 60% of Britons.

CityUnslicker said...

very succinct that first line BE - great comment.

andrew said...

War is peace
Freedom is slavery
Ignorance is strength

Those who advocate redistributing all wealth communist style tend to be fairly confident that they are the ones who will be doing the redistribution.
This can be hidden for a while, but eventually people notice that.

The less rabid on the left seem to be trying to construct a web of taxes and subsidies whereby most of the british taxpayers are also subidised by the state - creating the confusion over what a tax is.
This can be hidden for a while, but eventually people notice that and start to ask

"Why is my income taxed so someone else on benefits can have a spare bedroom"


Jan said...

It's the same kind of thinking which says the way to get out of debt is to borrow more and that printing more money has no effect on the value of the currency ie warped so whenever possible we need sane people to point out such truths before we all sink into a morass of leftie thought.

You are one of the few to point all this out so please carry on.

Gordon Brown has a lot to answer for; he was very good at muddying the waters.

Of course one could argue that the real winners from tax credits are low-paying employers.

Ryan said...

Yes I saw that Nicki Cambell travesty. Same old tripe. "It's all Thatcher's fault" (womans not been in power since I was a kid - she must have had power beyond all understanding). The Duke of Westminster has an asset value 40,000 times the average person - but that doesn't mean he eats 40,000 more meals than the average person or occupies 40,000 housing association flats. Being rich doesn't make other people poor - but it sure makes a convenient distraction from the real reasons! If you distributed the £1million p.a salary of those top bankers just amongst the banks own employees... they'd all be better off by £300 per year. Well that will by a nice hamper won't it?

Re-distribute the wealth of the rich and what you will find out is they don't have quite as much useful wealth as you thought. Same old mantra has been tried in Cuba, China, Russia and yet still people believe this nonsense. But maybe all we really need is 1/60millionth of Richard Branson's swimming pool and we'll all be happy.

Can anybody explain to me why I should give up 20 hours of my time every week for the whole of my working life to support the state which then spends it on buying the votes of the underclass? Where is the real morality in that? Why exactly shouldn't those that have never contributed to the greater good, simply be allowed to starve? And in any case shouldn't their children be taken away from them, given they can't even look after themselves? That's what they do in socialist Sweden... there is a price to pay.

And somebody somewhere should remind Methodist ministers that appear in such programmes that nowhere in the ten commandments does it say "thou shalt be forced give up 50% of all you own to a random person that deserves it least".



assurance auto said...

this is very interesting to us. we need to know more about how this tax is going . and how is the responsible for it . this is my job. more than that to do best in this approach , government need to see its paper ; for a good future.

jm said...

Didn't notice too much comment when, under the dreaded Gorgon Broon the marginal "tax" rates were over 100%...

Bill Quango MP said...

Harsh Ryan..Harsh.
Have you seen this figure that almost half of the people on disability didn't attend the disability test?

So..for 30 years , as i think we discovered at some point during the Blair era, many people were put onto disability to hide unemployment figures.

I wonder if this is where the stat I saw that 1 in 3 people are disabled comes from. 1 in 3? I thought..that can't be right. i' can see 50 people from my window and maybe 1 looks disabled. Even if 10 of them were, its not 1 in 3.

In Russia today, children that can't be supported are taken for adoption.
Very harsh. Yet its considered better for child and parent that this happens. Everyone knows the deal. Benefits are this {v.low} You need to have this {better than low} or you can't breed.
I'm not sure where I sit on this. It seems so ... Victorian.

Anyway, rambling..that's tequila shots at lunchtime for you..and I never drink...

Jim said...

We already live in a Marxist State -to each according to his need:

https://twitter.com/Art_Li/status/320811923341987840/photo/1

Why work hard, study, take on more responsibility, when the State will give part of your work to others who have not improved themselves, or work particularly harder, so that they end up with the same income as you?

Bill Quango MP said...

Interesting link that. I wonder if the data is available?

Steven_L said...

Just watched it on iplayer. You have a point about Nicky Campbell letting the lefties get away with some howlers. But then the think tank wifey and the TPA chap also let them get away with it too. Neither side could exactly be described as 'heavyweight' which is perhaps the point of this show.

Owen Jones does have a point about building more public sector housing for rent though. The public sector can simply grant itself the planning windfall and collect the gain in rent. They just have to change the housing legislation so they can let it to people who can pay the rent.

Ryan said...

"I wonder if this is where the stat I saw that 1 in 3 people are disabled comes from. 1 in 3? I thought..that can't be right. i' can see 50 people from my window and maybe 1 looks disabled. Even if 10 of them were, its not 1 in 3."

As far as I'm concerned, in an era where the blind, the lame and the diseased can all compete in the Olympics there is no such thing as "disability"

rwendland said...

The technical term for this is "marginal deduction rate", not marginal tax rate - Grant Thornton should know this.

But worth noting that Cameron made a much publicised speech in November 2009 complaining about such high marginal deduction rates. The only problem is that in govt, his solution(!) is to increase this from 70% under Labour, to 73% now. And under Universal Credit, the mainstream deduction rate will go up to 76% I believe. Actions speak much louder than words, don't they.

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Agence communication said...

great to see that "" Apologies for a very pedantic piece on a Monday morning, but someone has to raise it. Today is the first day of the next tax year and so there is some play in the media about the various tax effects of the budget and previous budget as to what all of those who may be due pay some tax may experience in their wage packets.

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. ""