2 thoughts on “The UK’s tax system punishes work, training, family formation and saving”

  1. Posted 28/05/2012 at 13:45 | Permalink

    I always get worried when I hear politicians (of all parties) talk about ‘fairness’ as a desirable feature of the tax system. This is not because I favour ‘unfairness’, but because I know that they are always talking about ‘fairness between taxpayers’ and not ‘fairness between taxpayers and the State’. A good example is the recent proposal to reduce the top rate of income tax from 50 per cent to 45 per cent from next year. This decision made no sense, except in terms of buying off the junior party in the coalition government. It will not reduce tax revenue by much — indeed, it might well actually increase it. It, predictably, has incurred political opposition — but no more than would have been incurred by going right back down to 40 per cent, which is what should have been done (as a first step). If ‘fairness’ between taxpayers is your criterion you can always ‘justify’ higher top rates of tax. Some of us oldies well remember top rates of income tax around or exceeding 90 per cent — as they have been in the UK for more than half my lifetime. In a recent discussion in this topic, to my surprise, I did hear an interviewer ask some leftie, if he was so much against reducing the top rate, why didn’t he suggest actually increasing it? A good question, but of course there was no time to press the interviewee on his answer. Only two Chancellors of the Exchequer that I can remember seem to have had any notion of a ‘reducing tax strategy’ — Geoffrey Howe and Nigel Lawson — and even they ended up with incredibly complicated tax systems (which have since got even worse). I still think there is something in my idea, many years ago, to require all Cabinet Ministers to sit an exam on the British tax system — with the overall ratio of total taxes to national income not allowed to exceed their average percentage score on the exam. As a service to the nation, I would volunteer to set the paper and mark it myself!

  2. Posted 07/06/2012 at 09:46 | Permalink

    I found the article’s emphasis on benefit withdrawal as a terrible, undesirable thing quite curious. Surely benefit withdrawal is part of the design of means-tested benefits, which aim to channel money towards towards those who do not have enough to make ends meet after their income is taken ito account, and not those who do. This causes problematic effects on work incentives for those individuals, but it is simplistic to look at the problems of means tested benefits by focusing on just one facet.

    The author is also simply wrong to state that it is necessary to go ‘very far up the income scale’ and earn £30k + to plus to make a noticeable difference to family income relative to not working. DWP publish a handy tax benefit model (available at http://statistics.dwp.gov.uk/asd/index.php?page=tbmt). Inputting the specification of household he cites for his examples (couple with 3 children over 5), the model shows that just by working 30 hours at the minimum wage, the household would be about £4,000 per year better off. This may be a trifling sum to Mr Booth but not, I suspect, to most of the inhabitants of this country.

    The author also seems to be falling into the trap of assuming that marginal effective tax rates are as high for all citizens as well as households with children. This is the only reason I could think of which might justify his comment that upskilling, promotion and training are a waste of time unless they raise thte student into the upper half of the income distribution. The total effect of tax and benefit withdrawal is extremely low for single individuals (about 30p in the pound) once they are earning above about £19k per annum. This is because entitlement to benefits is low to begin with and so benefit withdrawal phases out quickly.

    Finally, I don’t know how the author can come out with such a bald statement as ‘nothing that the government has proposed so far has begun to address these problems’ when the forthcoming Universal Credit has as its centrepiece the reform of the benefits system, and in particular the high marginal tax rates faced by particular claimant groups.

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