IFS: Reasonable to say rich will pay the Treasury more as a result of the Budget

Speaking on Radio Four’s PM programme yesterday, Carl Emmerson, Deputy Director of the Institute of Fiscal Studies said:

The Treasury estimates that it will lose £100million from cutting the top rate of income tax from 50 to 45 pence. That is not an unreasonable central estimate but there is a huge uncertainty around that. It also thinks it will raise about £500 million or so from the increases in stamp duty. Again, not an unreasonable estimate but it still has a big uncertainty around it. So, I don’t think the 5 to 1 ratio is particularly helpful, but it is fair to say that the Treasury is expecting to get more from the rich as a result of yesterday’s budget on average, and I think that is a reasonable thing to say.

* Paul Walter is a Liberal Democrat activist. He is one of the Liberal Democrat Voice team. He blogs at Liberal Burblings.

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14 Comments

  • Richard Dean 23rd Mar '12 - 2:08pm

    The £100 million is just a free giveaway since the people who receive it have had to do nothing for it. It is hardly “virtually nothing”! It could probably pay for a hospital or a few schools, for example, or for significant action to reduce youth unemployment.

    The Chancellor has presumably been duped by the city business people he’s talked to. If a manufacturing company wants to pay somone £250k, then the tax difference between 45p and 50p marginal rates is presumably just £5k, which is a relatively tiny motivator and tiny compared to the salary bill for the main workforce.

  • Just had yet another thoroughly irritating email, this time from Simon Hughes, telling me to go and shout about the Budget. Maybe Simon should read the intelligent Editor’s Letter in CityAM this morning – link here

    http://www.cityam.com/latest-news/allister-heath/osborne-s-middle-class-tax-bombshell

    Key extracts:

    * The top rate (which in reality is 42p with employees’ national insurance) will start at £41,450 in 2013 – now frighteningly close to the average full-time male income of homeowners of about £37,000

    * the phasing out of child benefit for those on incomes between £50-60,000 adds 11 per cent to the marginal tax rate of families with one child, 18 per cent to that with two and 24 per cent to that with three

    * (the Budget) has improved the marginal tax rates for over 500,000 folk at the bottom: if you earn less than the personal allowance, the rate you face on an extra pound of earnings is very low (though you may still pay national insurance and of course you then have the problem of the withdrawal of other benefits). Osborne will also improve incentives for those at the top, thanks to his forthcoming 45p rate. But he has made the situation worse for the 1.3m being dragged into the 42p tax rate and for the 400,000 parents affected between £50k-£60k. The range over which the personal allowance is withdrawn also keeps on increasing as the allowance grows, dragging thousands more into very high marginal rates (the range will be £100-£120k by 2014).

    Worth shouting about? I don’t think so.

    Astonishingly, therefore, the Budget may even have increased more taxpayers’ marginal tax rates than it reduced.

  • Sorry; last two lines of my post should be juxtaposed; the current last is part of the quoted piece; the current penultimate one is my comment.

  • Malcolm Todd 23rd Mar '12 - 3:24pm

    “frighteningly close to the average full-time male income of homeowners”
    Ah, but how frightening is its closeness to the average full-time male income of brown-haired, bearded homeowners in their 40s called Malcolm?

    Really, if you’re going to use averages, use meaningful ones, not ones designed to make the figure you first thought of look average.
    And if you’re going to use words like “frighteningly” try to save it for things that are actually, you know — frightening.

  • My concern, and I have not studied this enough to know whether it is valid, is that in stating “the Rich” are going to pay more, we are actually saying the rich who move home or buy property. It doesn’t seem right to reduce the tax burden on those earning more than 150K who are not buying property if we are all supposed to be in it together.

    For those who do not it is just a 5% reduction in portion of their tax bill. I mentioned on another post that good planning will allow those who can afford it to delay a bonus or rise until April 2013 and avoid the 50% rate this year..

  • And as for addressing the points about perverse marginal rates, Malcolm…anything to offer? No?

  • Malcolm Todd 23rd Mar '12 - 4:03pm

    No, you’re quite right about the effects on people in those bands of income (£50–60k and £100–120k) — it is rather perverse; though still nowhere near the marginal rates of tax and benefit withdrawal faced by people on really low incomes of course. I’m sorry if you were hurt that I didn’t say so before; I don’t always mention that I agree with something.

    The withdrawal of personal allowances on incomes over £100,000 is petty and pointless as far as I can see; and becomes all the more so as the range of different allowances is quite rightly simplified, hopefully to the point before long when there’s just a zero-rate band for everybody. Whatever it would cost to get rid of the tapered allowance withdrawal, let’s just do it and raise the equivalent amount by dropping the top rate threshold by however much necessary.

    Withdrawal of child benefit’s more of a problem. If you’re going to withdraw it — and there’s certainly plenty of popular support for getting rid of universal benefits these days — you’re going to create a high marginal rate somewhere in the system. Universal Credit could one day mean a genuinely straightforward, single income-related benefit with a single taper. But either the withdrawal rate will be high or it will be paid to households that most people would consider ridiculously high up the income scale. I don’t think there’s a realistic way around that.

  • Alex Sabine 23rd Mar '12 - 5:51pm

    @ David: “The £100 million is just a free giveaway since the people who receive it have had to do nothing for it.”

    This strikes me as an astonishingly illiberal statement. It is true only if you believe that all income belongs in the first instance to the state, and is then allocated by the state to individuals.

    I take the opposite view: Income or property belongs to the people who earn it or have legitimately acquired it, and a case has to be made for taxing it away.

    I also think, as an extension of that, that in all but very exceptional circumstances every taxpayer should be the majority shareholder in his or her own income and capital. That is not the case with income tax and NI reaching 58p in the £ as it was before the Budget (indeed it will still be 54p with the new 45p top income tax rate).

    Of course there are limits to the scope for tax reductions during a period of austerity, and there is quite properly a debate about priorities and about the effectiveness of different rates and forms of tax in bringing in the revenue needed to help tackle the huge deficit.

    But to elevate punitive taxation – even of those on high incomes – to a matter of principle, to argue that the UK must persist with the highest top rate in the G20 even if we can raise as much or more revenue from the wealthy in other ways, seems to me a strange position for liberals to adopt.

    (I should stress that, as a basic-rate taxpayer, I have no personal financial interest in the lower top rate, more’s the pity!)

  • Alex Sabine 23rd Mar '12 - 5:52pm

    Sorry, I meant to address my last comments to Richard Dean. Apologies David.

  • Malcolm Todd 23rd Mar '12 - 6:21pm

    @Alex Sabine — I’m puzzled by your figures. National Insurance on earnings over £817 per week (effectively the higher-rate threshold for income tax) is only 2%: your figures seem to suggest 8%, rising to 9%. (As it happens that is the Class 4 rate, i.e. on self-employed profits, but again it only applies on profits up to the higher-rate threshold then drops to 2%.)
    See HMRC website.

  • @Malcolm

    I assume Alex is including employers’ NICs. And quite rightly too as it’s just an even-more opaque income tax, although those rates are on the total cost to the employer rather than headline wages (post-employers’-NICs).

    If income tax and all NICs were merged, wages would theoretically rise leaving people on exactly the same post-tax income, but even the basic tax rate would be high, at 40.25%. You can see why governments aren’t keen to end this deception.

  • Alex Sabine 24th Mar '12 - 3:04am

    Malcolm – Adam is right, I was including employers’ NI, and for exactly the reason he gives.

    We need to think about tax incidence, about who ultimately pays taxes rather than who they are formally charged on. Fundamentally, there is little economic difference between employee and employer NI: they both tax employment income specifically (rather than on savings interest or other types of capital income), hence the slogan that NI is a ‘tax on jobs’. And, just like income tax, both types of NI act as a wedge between what the employer has to pay and what the employee receives in take-home pay.

    To the extent that employer NI is ‘passed on’, it reduces employees’ wages/salaries; to the extent that it is borne by the employer it increases unit labour costs and thus reduces the number of people who can be employed for a given financial outlay.*

    So for this reason there is a strong argument for factoring-in employer NI into calculations of the tax rate charged on labour income.

    The way the figures work is as follows. If you look at income tax and employee NI in isolation, our tax schedule has three main marginal rates: 32% (20p basic rate plus 12p employee NI), 42% (40p higher rate plus 2p employee NI), 52% (50p rate plus 2p employee NI). Following the budget the top rate will come down to 47%.

    This is one legitimate way of looking at it, since it corresponds to the direct deductions employees see on their wage slips; but for the reason above it arguably gives an incomplete picture.

    If we DO include employer NI the calculation is as follows. Employer NI is a flat rate of 13.8%. You don’t simply add this to the income tax plus employee NI percentages, because the denominator is now a larger figure, representing the total wage bill: so the employee’s gross wages (100%) plus employer NI (13.8%).

    To take an example of someone earning £50,000, the total wage bill for that employee is £56,900 including employer NI. As a percentage of employer cost, the marginal tax rate at this level of earnings is 55.8 / 113.8 = 49%. This is the proportion of an extra £ that the employer spends employing someone that is taken in the three taxes, and which therefore reduces the employee’s take-home pay.

    For basic-rate taxpayers the total marginal tax rate is 40%, for higher-rate payers it is 49% and for top-rate payers it is currently 58% and will decline modestly to 54% following the top-rate cut.

    So, to summarise, the scale excluding NI is 32p, 42p, 52p (47p from next year) and including employer NI it is 40p, 49p and 58p (54p from next year).

    (For the sake of simplicity I’ve ignored the nasty spike in marginal rates that occurs just above £100k and which David rightly draws attention to; in this income range the rate is 60%+ just on income tax plus employee NI due to the withdrawal of the personal allowance.)

    So the marginal tax rate on labour income is 40% even at wage levels as low as £10,000 or £20,000.

    And of course once employees receive their wages they then pay VAT on many of the things they buy out of their post-tax income. Indeed, the IFS often factor in VAT and duty rates (correcting for lower-rated or exempt items) when calculating marginal tax rates because they point out that what matters to people is the quantity of goods and services they can buy with their post-tax earnings. On this basis the effective marginal rates get higher still.

    * (In the medium term we would expect the extra cost of a rise in employer NI to be passed on mainly through lower wages than would otherwise have been paid, rather than higher unemployment. During periods when earnings are growing at the typical 3%-5% rate, a small increase in NI could be accommodated simply by reducing pay increases. But when earnings growth is low to non-existent, as is the case currently, there may be a time lag given ‘sticky’ wages – the difficulty of cutting wages in money terms – and this can lead to job losses. Correspondingly, cutting employer NI would probably be a more effective way of stimulating job creation in today’s conditions, or mitigating job losses, than a cut in employee NI: given the amount of spare capacity and lack of wage pressure, employers would probably maintain or expand employment rather than increasing wages.)

  • @Alex Sabine
    “We need to think about tax incidence, about who ultimately pays taxes rather than who they are formally charged on.”

    Agreed, I’ve seen the light dawn on many people when they query the final amount on an invoice for services/labour and I’ve had to explain to them how, if the person is self-employed, the government potentially takes ~65% of the total invoiced amount as tax (through VAT, NI and Income tax deductions) – which is why many people either set themselves up as a company to try and reduce amount the government takes, or prefer cash with no transaction paperwork…

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