Monday, March 21, 2011

Tax is taxing... but let's not bullshit about the rates

If George Osborne really does decide to merge NI and Income Tax so as to make understanding personal taxation simpler then on the face of it it's pretty decent idea. After all, as Guido noted yesterday, no one believes that the Government taking a percentage of gross earnings is anything other than a tax.

However, there is something else that we need to watch out for in the argument, and that is the claim that when you chuck NI and Income tax together, the real starting rate of tax is 32%. What's more higher rate taxpayers are really paying 52% of their earnings in tax... however, this is actually and entirely misleading.

You see, we have, irritatingly, a progressive tax system. That means you pay NI on the gross before tax. Then you pay Income Tax on the taxable amount, which is the gross less the free 7Kish. Then you pay one rate on the next 20 odd thousand. If you go up into the 40% rate you only pay it on the amount you are in it by.

In other words, if you earn £1 over the threshold you would pay 40p to the taxman on that £1. Horribly confusing I know.

Anyway, the bottom line here is that not even someone earning £150,000 per year pays 52% of their income in taxes. In fact, someone on £150K (the 50% tax rate) will pay a combined amount of NI and Income Tax to the tune of £58,900, that 39% of their earnings in tax. Someone on £50K (the so-called 40% higher rate) will pay £13,910 in NI and tax, that's 27% in total.

Now don't get me wrong, I still think that is way too much. However, trying to win the argument for lower taxes on the basis of exploiting the confusing nature of a "progressive" system to make it sound much worse than it is is the wrong argument to be making because you'll be called on it.

A much sounder platform to be on is to make the case that the tax system is so utterly confusing that tax rates should be flatter, instead of this crap where you pay a percentage on the gross, then you get a pay one rate on one part, and another rate on another part, less your free part.

Note: It's not hard to find up to date salary calculators online that show you exactly what the breakdown of earnings and deductions is.

UPDATE: One thing I forgot. It is lie on the part of Lib Dems to say that they;re taking low earners out of tax altogether because the low earners still have to pay NI on the gross income. If you mereg the two into income tax only then there will be a massive loss that would need to be offset by the rest of us earning above the tax-free threshold to maintain the claim that no one on low earnings paid tax.

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