Student loans, tax and perverse incentives

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A valuable diagram has been put on line regarding the effective tax rates students will suffer as a result of student loan repayments.

The graphs are not by me, but by ‘adthenad’ who produced the blog they come from and who, I assume, has opted for anonymity.

It shows the marginal tax rates those repaying student loans and other people will face under the new regime (although I’d add, these aren’t so very different from the existing one except they’ll endure a lot longer in many cases as the absolute amounts to be recovered will be so much higher):

Now we can argue forever about whether tax is a disincentive to work, or not. I happen to think it probably is — but only when tax rates persistently above 50% at higher rates of income, although accept that this can also be the case at lower tax rates when income is lower. In other words, the disincentive effect is related to rate and income, and the disincentive effect may well be greater when income is lower. There’s nothing radical in saying that — this is an argument for steadily progressive taxation and  I stress, this is based on observation and my interpretation — nothing more.

More important, those introducing this policy do believe that tax has a disincentive effect — Cameron and Osborne (who have never had to worry about these things and appear not to have an iota of entrepreneurial spirit between them) say that tax is an impediment to enterprise, often.

Why then are they creating a situation where a person can have an effective 40% tax rate at just over £20,000 of income? And note that this will rise soon to 41% soon when NI goes up — the exact same rate that many ministers pays on their vastly higher salaries?

They might also like to discuss the impact on future entrepreneurial activity, risk taking and even tax evasion of persistent 50% tax rates for those in the £50,000 - £100,000 range who are often inclined to create new businesses.

And they might even want to consider why there’s almost no chance at all, of course, that the rate of 60% will be paid by those earning over £150,000 because they’re most likely to leave university with no debt at all as they’re most likely to a) have parents who paid in full so they have nothing to repay or b) have debt that is repaid in shortest duration and with lowest marginal impact on well being. 

If the Tories and Orange Bookers really believe tax is a disincentive then sure as heck they’re doing their best to make such disincentives real.

And all to ensure that the wealthiest stay wealthiest. It is hard to see it any other way.

NB — even harder when you read this which seems indicative of the same deliberate policy of exclusion.

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