Tax rates should fall as earnings rise
With the 10p tax rebellion resolved, the Finance Bill is finally heading for Royal Assent raising the top income tax rate to 50p. Is it too late to suggest tax rates are upside down? They should fall as we earn more.
Britain has had a progressive tax system for a century - since Lloyd George’s “people’s budget” of 1909 put supertax on the rich. By 1945 there were 10 tax bands and there were still six - from 27 to 60 per cent – in 1988 until Nigel Lawson’s budget rationalised them to just 25p and 40p in the pound.
But despite the established history of differential rates, they are still wrong way round. Tax rate should start high and fall as people earn more.
Even if it is fair that high-earners pay more tax, there is no logic in making them pay higher rates. It is questionable whether anyone should pay twice as much tax for earning twice as much pay (do they consume more state services?) but why double the tax rate as well?
Overtime rates are a recognition of basic economic laws and social behaviour. Someone prepared to work all day for £20 an hour needs to be offered £25 or £30 to work extra time. But to tax the extra hours at 40 per cent instead of 20p in the pound takes away the overtime premium.
Tax rates defy those basic economic principles. At worst workers should be paying the same proportion of their overtime or bonus in tax; preferably they should keep a greater proportion.
If we taxed everyone 50p on their first pounds they would be keen to work harder and longer to start earning wages taxed at only 40p and even keener to move up to the 20 per cent tax band. Perhaps instead of our first income being tax-free, we should charge zero tax on all remuneration above a particular threshold as an incentive to keep working.
Such a policy would improve productivity and encourage people to earn more, thus making them less dependent on the state (so less tax would need to be collected anyway), and it would make the population richer, allowing them to consume more (helping the economy) or save more, making them less dependent on the state in later life too.
The current policy of leaving people with less of their marginal income is a disincentive to work. People need to earn more just to compensate for the higher tax. As that is not possible (workers cannot raise their wage rates just because it is the end off the week or late in the tax-year if they are heading into a higher band) they prefer to take time off or avoid promotion because the extra net pay is not worth the effort. Input exceeds outcome.
That is as true in the boardroom as on the shop floor. Why do extra work for £1 when from next year it will put only 50p in your pocket. In particular, why accept a £50,000 non-executive directorship when your full-time job means you will receive only half of that despite doing 100 per cent of the work?
It is too late for the chancellor to change this year’s Finance Bill but future chancellors should remember why Nigel Lawson scrapped most tax rates. The truth is that the progressive tax system has nothing to do with incentivising workers, simply with taxing the rich because they have the money.
July 22nd, 2009 at 2:49 pm
To suggest that people (and by this I mean real people who make up the bulk of UK tax income rather than an insignificant minority such as non-executive directors or dare I say it, Finance Directors) will turn down pay increases or overtime for tax reasons is laughable.
Do you have any idea what thought the masses give to tax bands….? Somewhere approaching zero I can assure you.
So let’s just be clear that what you are really saying is that the top 2% or so of workers within the UK, who will make decisions based primarily on tax implications (such as yourself clearly), should pay less tax. Fine, but don’t attempt to bury that slightly selfish idea under an imaginary “social conscience”.
One suggestion I might profer as to why your thinking is flawed is that earnings accelerate exponentially as you climb up the corporate ladder, a rate which is entirely disproportionate to the recipient’s “value” which remains broadly unchanged. Executives with high wages and poor track records have reached plague proportions throughout the city. Accelerated pensions, golden hellos, goodbyes and parachutes, bonuses unrelated to actual performance. These are all devices used by the top tier to feed their greed. The increasing rates of tax can barely be said to offset their effects, let alone disincentivize them. (You will no doubt argue that the accelerated pensions etc are devices intended originally to offset the tax problem. This however still doesn’t change the reality that “executives” are NOT significantly more able than the top 25% of the masses who they “lead”)
The negative effect of this unfair skewing of “value” are not simply economic, allowing people of dubious character and ability such as Fred continuing the hegemony of a “chosen” few at the expense of the many, many truly intelligent people in the UK who perhaps don’t have such a money-making bent, or self aggrandising character. This in itself is a social injustice. As has ever been noted by those of an intelligence not purely devoted to personal gain…”Those most likely to find themselves in a position of power are usually the least suitable to hold it.” Viz….http://www.physorg.com/news142607754.html
In brief: I say that the 50% tax band is entirely suitable, as the law of diminishing returns most certainly applies to all humanity in relation to earnings.