I have the following on Comment is Free this afternoon. I do so in a double-header article against a proponent of the abolition of the tax rate. Please leave comments on CiF as well as here on what she has to say:
The 20 economists calling for the abolition of the UK's 50p income tax rate are wrong to do so.
The reality is that this tax rate will raise £2.7bn to close the UK's fiscal deficit caused by the failure of UK banks — for which many who have incomes of more than £150,000 a year, and so pay this tax rate, work.
It's also true that while the UK undoubtedly needs tax cuts to stimulate the economy, a cut in the 50% tax rate is probably the least likely to do this. Cutting it will boost savings, of which we already have a glut, or house prices in the south-east, which are already too high. There's little or no chance it will stimulate spending.
Nor will it boost entrepreneurship, which is about people taking risks and creating companies. Most people earning £150,000 a year do neither. They speculate for banks and pension funds using other people's money (where, let it be noted, most have been so successful that their average rate of return in the last decade has been about zero at best) or they rise through the ranks of multinational corporations, enjoying secure employment and large pensions until appointed to positions where they can distort pay and rewards in their own favour. As a result their main contribution to society is, in fact, to increase the income and wealth gaps, which we know produces worse outcomes for all.
So that's not entrepreneurship. Entrepreneurship which leads to growth, new business and new jobs is done in small companies by people who often work for long periods for nothing (and so pay little or no tax). Their income is usually sheltered in companies — and those companies only pay tax at about 20%. The 50% tax rate is no disincentive to real entrepreneurship.
So how did so many economists get this so wrong? Because they think accumulating cash through manipulating markets is wealth creation. Well, as someone who has been an entrepreneur: they're wrong. What is more, the last thing entrepreneurs worry about is tax. They take risks and create businesses just because, like those who climb mountains, they need to do so.
The person who claims they're put off by tax is not an entrepreneur at all — they just want to accumulate cash. The UK Exchequer is justified in asking for a fair share back to ensure it can provide the support needed to the real wealth creators in the UK — very few of whom make £150,000 a year.
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Wasn’t it true that, in the 1960s, the very top earners had to pay 19 shillings out of every pound in tax?
Note for people under 40: an old £1 was equivalent to 20 shillings! Therefore, the very top earners were paying around 95% of tax!!
We should bring back a little of that back now! You’ll be deafened by the pitiful squeals!! 🙂
Actually it was 98%
Actually, the top rate of tax was 83% on earnings. There was also a 15% “unearned income supplement” but, as the name suggests, it only applied to income such as interest.
Really? I worked it out at 95 percent of 20, or 19/20 and got 19! Obviously got my figures wrong and I’m certainly not going to argue with a tax expert! 🙂
But it was 98% tax so not 19 shillings
Obviously, D’oh!!! 🙂 So it would be around 235d (and a bit) or 19 shillings, 7d (and a bit) – correct?
Its just I heard someone quoting 19 shillings tax for high earners out of every pound (a pound being 20 shillings, of course) a number of years ago. They were obviously quoting around about, not exactly.
98 percent tax!! It’s reveals how much attitudes have changed in the past 40-odd years or so, doesn’t it? In this case, mostly for the worse!
The BBC have had this ‘news’ story at the top of their agendas all day. I wonder if a similar letter calling for the retention of the tax would get quite the same coverage. As you say in your earlier post Richard, the letter has no factual evidence to back up its arguments so why is the BBC pushing it so hard? It’s hardly a Peston-type scoop. Even the Torygraph isn’t giving it much coverage (perhaps because it is a letter in The Times) and The Guardian mentions it only from the angle of how it could be a divisive issue for the coalition. Perhaps the BBC are softening us all up for the announcement, probably to be made by Osborne at the Tory conference, so it isn’t seen for what it really is: a tax cut for the well off. Cameron and Osborne are good at PR and they know there is much validity in the old saying that a lie repeated a thousand times becomes the truth.
It stopped attention being given to the destruction of the NHS
How convenient
whilst i might agree with some of the article, the writer is rather let down by some very generalistic assumptions:
“Their income is usually sheltered in companies — and those companies only pay tax at about 20%. The 50% tax rate is no disincentive to real entrepreneurship.”
Is it?………. i thought the LLP/partnership was now the vehicle of choice to avoid employers NI……..
Even if these people do generate 150k a year in a small company and pay 20%, they still have to get the cash out to “enjoy” it, and thus pay income tax on dividend income (albeit with a tax credit attached) – again completely glossed over.
“Most people earning £150,000 a year do neither. They speculate for banks and pension funds using other people’s money…or they rise through the ranks of multinational corporations, enjoying secure employment and large pensions until appointed to positions where they can distort pay and rewards in their own favour. ”
I must have missed this publication of data by HMRC where it set out details of the backgrounds of all those who are in the 50% band.
Its a shame as the article could have been more powerful, but the writer has gone for the usual trick of some sensationalist nonsense to try and make headlines
Well if you noted there are a few thousand LLPs in the UK and millions of limited companies you’d note that I did actually base my argument on the facts
And sure rewards have to be withdrawn from limited companies – but £150,000 from a small entrepreneurial company is very, very rare
And that’s in part because entrepreneurship often involves reinvestment of profit
It is a myth that people earning 150K are all rich, probably bankers, have secure jobs and have fat pension pots.
There are many people who earn that amount who are extremely hardworking, have invested heavily in their own human capital, do not have guaranteed jobs and are on money purchase pensions – and above all do not have great pots of cash stashed away. And are not employed in financial services.
They’re still in the tope 1% of income earners
And £150k a year is a lot of money that more than ably means they can make ends meet and pay their fair share of tax
You simply can’t win this one: progressive taxation is just and we should have it
40% is still progressive.
1% , 2% , 3% is progressive
That misses the point
The Article is like the Curate’ s egg – good in parts. A few points though. The 50p rate
is really a middle class tax, I don’t think a lot of rich people pay 50%.
The 50p rate is actually higher than 50% for certain levels of income- and we are not talking top earners. Lastly if you take a lot of the owners in say the skilled professions what is the risk incentive for them to employ more people if their reward is only half of their NET profit earned?
I would rather have 40% vigorously collected e.g. there is a lot of undeclared investment income earnt by higher rate taxpayers, let alone avoidance and evasion rather than a “token” 50%. The 50p rate is purely left wing political windowdressing.
No one pays 50% of their income in tax
Shall we get facts right?
@ Richard
No one pays 50% of their income in tax
Not true. Many bonus schemes are profit share schemes where the profit share is done pre the employers share on national insurance. In other words, out of the amount the company is prepared to pay the employee comes their net salary and the employers NI. This is the correct way to look as employer NI is actually a tax on the employee not the company as it reduces the amount available to pay staff. Looking at it this way, an employees tax rate crosses 50% once earnings cross around £210,000.
Oh come on, we can all make up bogus stats
The Taxpayers’ Alliance does it almost daily
Claiming employer’s NIU is employee’s tax is just such a case
Great Richard, on your logic lets jack up employers NI to 50% and scrap all income tax, making us the most attractive place in the world to work, causing businesses to flood in hear to set up operations.
Employers NI is a tax on the employee as it reduces the amount that can be paid as salary. If two companies, one in the UK and one outside the UK, are manufacturing the same product, out of the same materials, which sells for the same price on the global market, do you really believe that the UK company will pay the same salary to the employee and not be forced to adjust it for the cost of the employers NI.
Get real
Our ‘payroll taxes’ are low compared to most EU countries
Just go and check
If you earn £1,000,000 you pay £478,000 in income tax and £23,350 in NIC meaning the Government is taking 50.135% off you. Obviously that will then nudge higher towards 52% as you earn more.
If claiming that employer’s NIC represents a tax on earnings is bogus, I’d say that claiming that employee’s NIC ISN’T a tax on earnings is equally bogus.
Well actually, it isn’t a tax….which is why it is so regressive
I can’t see how it can be denied that National Insurance is a tax in everything but name. The fact that it’s regressive doesn’t mean it isn’t a tax. It’s not like you can say paying NI gets you much either. Anyone earning above the LEL but below the PET (and so paying nil NIC) is going to get identical benefits to someone earning a few thousand above the PET.
The fact that it’s regressive doesn’t mean it isn’t a tax. And of course for the employer it isn’t regressivve.
If the government cut VAT to 10% and imposed an identical 10% ‘Osborne Tax’, I’m sure no-one would let them get away with saying they’d halved VAT.
As it is, it allows Governments of all persuasions to talk of a basic tax rate of 20% when the reality is they start taking 32p in the £ from someone earning over as little as £7475.
So, the fact of the matter is that it IS possible for someone to have over 50% of their income taken from them in employment taxes. It’s no big deal, I’m just surprised you can’t just accept this small point.
As for Employer’s NIC, it’s a Government tax on employment income, is it not?
No, you misunderstood. Sorry if I misled, I am talking about marginal rates of tax .
There is really a lot of guff spoken on this subject. We cannot collect properly at 40%
let alone 50%. You know as well as I do that HM Revenue & Customs do not have the resources and maybe the will.
We could collect at 40% – we just abolish all tax reliefs for those with income over £150,000
I agree that this ‘issue’ is a well-timed distraction from many more important things the government is trying to get away with. As ever, the ‘complainants’ dwell on the percentage of tax they are paying rather than the absolute amount. When any of us, rich or poor, goes to buy petrol, for instance, we are not charged according to how much we earn, we are charged a fixed price. This applies to everything (except tax), so people on £150k a year are still vastly better off than people on £25k a year, even including tax. The cost of living is a fixed rate expense which some can afford and others can’t.
If the government want to cut taxes to stimulate the economy then they should reduce VAT to 15% again, which would at least benefit us all, including those on £150k a year.
The issue of entrepreneurship is also trotted out as though anybody who isn’t an entrepreneur is somehow defective. We can’t all be entrepreneurs as there would be no nurses or people to fix the roads. Entrepreneurship should be encouraged but that should be through offering tax incentives for employing people rather than increasing the wealth gap.
And why do they always threaten to mince off in a huff to some other country? Tax rates in America are lower but healthcare costs are huge and mostly borne by the employer (that means you, mate – the ‘entrepreneur’). Or maybe you could try Russia where it’s freezing cold and you need bodyguards 24/7 to stop you having to pay your £150k in ransom to the local mob?! I don’t think these UK based entrepreneurs realise quite how much they benefit from the NHS and a good police force (roads, aqueducts etc. you know the thing).
And how many of these ‘laser-brained business athletes’ on £150k a year actually pay all their tax anyway? How much of it is spun away overseas into Swiss bank accounts via offshore subsidiaries and ‘trust funds’?
There are two deficits in the UK economy, one is the public sector borrowing deficit and the other is the £1.2Bn in avoided, evaded and off-shored taxes which this government (and the last one) refuses to collect… Surely that’s the real scandal? If all that tax was collected we could all benefit from a cut.
I meant £120Bn – sorry!
To this layman is appears that these economist are using the theoretical economics of “Laffer curves” and “Trickle down economics” (wikipedia/google them) to justify a position they have been asked/paid to take. Or did they just all get together and decided spontaneously to publish this letter out of the goodness of their own hearts.
To me, the problem with many bits of economic “theory” is the apparent lack actual evidence to substantiate a hypothesis which then goes on to somehow become interpreted as facts. This coupled with economists track record at predicting the economy leads me to have doubts about whatever they say.
Call me suspicious/sceptical of motives behind it if you wish but as other people have suggested maybe this is a well timed distraction.
The economists seem to be generally employed UK academics on salary’s in excess of £150,000 who have no option to ‘go abroad’ .It smacks a bit of vested interests against the 50% band.
I tend to agree with Osborn that we should look at the revenue it brings in. However, HMRC say they cant conclude this till after Jan 2012 (obviously when they get all the 2011 Tax Returns in for analysis) but they could look at the 2010 data now and make a prediction.
Give me access to HMRC data and I would have it in a week…then make an informed choice.
“To me, the problem with many bits of economic “theory” is the apparent lack actual evidence to substantiate a hypothesis which then goes on to somehow become interpreted as facts. This coupled with economists track record at predicting the economy leads me to have doubts about whatever they say.”
Well, while it certainly wasn’t perfect by any means, Keynesian economics was implemented post World War II quite succesfully for almost 30 years. It had its blips (the devaluing of the pound in 1967 springs to mind) but, on the whole, it created a period of long term prosperity. I’ve little doubt that many of the problems that arose during the post war period from 1945 – 1979 were as a result of succesive government’s taking an axe to the national debt. For example, the national debt to GDP in 1963 was 103%.. By 1972, it was 59% of GDP – a cut in the national debt of 44% in just under a decade!
Why these cuts in the national debt were implemented when the job of rebuilding the country was still far from over remains a mystery to me.