Home—Blog—Does the 50p tax rate work? We won't know for five years
Feb 22, 2012, 11:04
Posted byMerryn Somerset Webb
Comments (37)
Here is a silly bit of crowing in the Guardian about how the 50p tax is actually raising money for the state. It isn’t silly because the numbers are obviously wrong - it may well be the case that the rate has bumped up the tax-take in the 2010/11 tax year, although not by nearly as much as its fans hoped it might (note that, so far, the total self assessment-take is actually down £500m or so on last year).
But it is silly because it assumes that, if it has bumped up the tax-take, then it will continue to do so. A good many 50% payers will have found that there is little they can do about their new tax rate in the immediate term – they get paid PAYE, so avoidance is tricky, and those who are freelance or self employed may not have stopped to think about it in time for this year’s tax bill.
However, if they have just sent their January cheques off to HMRC, I can pretty much guarantee they are thinking about it now. Next year, they might work less. They might contribute more to their pensions in order to avoid the rate altogether (everything over £150,000 put in a self-invested pension plan (SIPP) gets the 50% paid back – see this week’s magazine for more).
If they haven’t already, they might incorporate. If they are relatively footloose, they might move abroad for their high earning years: if you can be a freelance from Bristol, you can probably be one from Hong Kong too.
They will move all their income producing assets into their non-50% paying spouse’s name. They will pay the maximum into CTFs, junior ISAs and ISAs and they’ll start looking more closely at the tax-free income on offer from various renewable energy projects (expect to see a whole load of wind turbines going up in your rich neighbours’ gardens). And if they are already rich entrepreneurs, they might just not bother with their next project.
We don’t yet know exactly what the elasticity ratio of our rich is (the extent to which they change their financial behaviour to avoid tax). But I suspect – from my conversations with the high-paid and from the data so far - that the next five years will prove it is a great deal higher than the last year suggests.
Let’s not forget that the UK now has one of the highest top rates of income tax in the world: only Sweden and Denmark charge more (see the chart in the Spectator but ignore the words - there is a mistake in them).
Until I see genuine evidence to the contrary (which I don’t expect to), I can’t see much reason to think of that as a good thing.
Published in Blog More articles by Merryn Somerset Webb
By Merryn Somerset Webb, May 22, 2012
By Merryn Somerset Webb, May 21, 2012
By James McKeigue, May 19, 2012
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(22 February 2012, 03:23PM) Complain about this comment
MerrynSo what do you think is the "optimal" tax rate for high incomes? Given the greater scope for tax avoidance and evasion by high earners on the basis of your argument they should they be taxed at a lower rate than for low earners as this would raise the revenue collected. But how low would high earner tax rates have to fall to maximise revenue as many forms of tax avoidance may incur little cost and would be worthwhile at almost any rate? As you say we don't know the "elasticity ratio" of the high earners but your speculation that they will do more than grumble is just that.An alternative is to reduce the scope for avoidance and clamp down on evasion. We need HMRC to be effective, efficient and customer friendly. The priority should be to reduce the burden on low incomes and to increase work incentives. Are Denmark and Sweden such basket cases compared to low tax countries?
(22 February 2012, 04:12PM) Complain about this comment
Flat rate tax of 20%, on everything, income, capital gains, whole estate on death, vat. Ruthless anti-avoidance measures, which would most likely be unecessary. Scrap the bands, scrap all of the various allowances. And then please Mr Government just leave us all alone to get on with running our lives and not being micro managed/tinkered with.
(23 February 2012, 12:50AM) Complain about this comment
+1000 to Alex's comment
(23 February 2012, 10:36AM) Complain about this comment
I've learnt to live with the 64% higher tax rate. When I was only paying around 45% I was a bit lax about tax avoidance but over the last couple of years I have made it a priority and pay less tax now than I did before. I have a steady stream of tax free income now which I hope will continue into retirement and a chunky "rainy day" fund which will not subject to taxation even at death. The fly in the ointment is of course retrospective taxation such as was introduced on substantial pension pots and increased further under this government. I note your other article discussing taxation on ISAs and also discussion in the Telegraph this week, which I suspect is a bit of kite flying from the Treasury to assess public opinion prior to its introduction
(23 February 2012, 03:31PM) Complain about this comment
Indeed Dr Ray, this is the point, were I lucky enough to be Tony Blair, just an 'ordinary guy with a social conscience' who earn't £6m last year I might not mind paying £1.2m in tax, a 20 percent flat rate......but asking the poor chap to pay more like £3m in tax clearly resulted in his employing a rather good accountant and paying more like £150,000 in tax.
(23 February 2012, 07:45PM) Complain about this comment
Oh dear Merryn. This sort of idiocy shows your true colours. To snipe at the very reasonable tax of 50pence in the £ for taxable income in excess of £3,000 a week is shameful. Surely you are embarassed to promote the idea that it should be cut? It is not an issue of how much it raises, but the clear signal of fairness it sends to everyone else. It may raise nothing at all, in which case we may as well keep it just for moral reasons to reassure the 99% that something is being done about inequality and greed. If it raises nowt then it can't hurt the fatcats that gripe about it. if it raises something all well and good.
(24 February 2012, 09:25AM) Complain about this comment
#6. Boris, I think this level of tax is a mistake; you clearly disagree. In time, we'll see what the data says...but if the 50% tax is ultimately judged to raise less money, then keeping it is just dumb economics. Fairness works both ways. I don't think it's fair that the state wastes billions of our money. I don't think it's fair that the state wants to take more than 50% of my income and thinks it can spend my money better than I can. I think the state can be smaller, still offer the vital front line servies that make this country a civilised place and lower the tax burden. Why do you think the only solution is higher taxes?
(24 February 2012, 11:05AM) Complain about this comment
@borisWhen the government wants to discourage smoking they increase the tax on fags. When they want to discourage drinking they increase the tax on booze and when they want to encourage people to buy smaller cars they increase the tax on larger cars.What is confusing here is why the government is wanting to discourage wealth creation and working.
(24 February 2012, 02:31PM) Complain about this comment
@ dr ray. How can you confuse 'fair and reasonable' with 'desperate'? The government is broke and will take money from anywhere and this gives the appearance of bashing a few rich people along the way. Although it won't. I agree with alex (no.2). A simple, catch all tax system would most likely net them a bigger take.
(24 February 2012, 03:02PM) Complain about this comment
#7 & #8 Andy and Ray. Earning over £150,000 doesn't make you a wealth creator. Most such people are paid in dividends or by the sale of their business,they pay CG. The 50% tax is designed as a gesture toward the now ingrained habit of snout in the trough pay. I could equally poinmt out that the income tax raised from people earning less than £10,000pa is miniscule too ( less than £1 billion last year). It raises so little why have it? Surely it is a disincentive for those on low wages. Someone non minimuk wage effectively pays over 11% income tax.
(24 February 2012, 05:36PM) Complain about this comment
And furthermore, Boris, it wouldn't surprise me if most high earners are such because of the rigging of the 'playing field' in their remunerative favour; not because of their fair worth to society as a whole, more to their parenthood and the 'old boy' network.The fact that they can legitamately 'avoid' taxation is further testament to a rigged 'playing field'.Now we have this Mess. Despicable.
(24 February 2012, 05:49PM) Complain about this comment
#11 Rick . Right again. I'm increasingly drawn to the idea that the City of London Corporation is more insidious than Goldman,the Freemasons and Al Qaeda put together. I'm really disappointed that Merryn of all people could have such a narrow and ill informed opinion of the poor and cavalier attitude to the rich. I had her down as more pf a deep thinker than a gut right wing apologist.
(24 February 2012, 05:53PM) Complain about this comment
Boris & CriticYour comments show a level of envy typical of socialists generally. You are unwilling to accept that maybe, just maybe, there are people around who are cleverer than yourselves, have worked harder and have made sacrifices so that as they reach the highpoint of their careers as barristers, doctors or company directors they can earn a high but not extraordinary wage and benefit society (and GDP) in the process. In Cambodia they took such people and murdered them. Fat lot of good it did the rest or the economy of the country. Other formerly communist states like Russia, China and Vietnam now encourage and reward enterprise and look were it has got them.BTW Boris, additional tax has to be paid on dividends by higher rate taxpayers but you are right in that these are only taxed at 50% whereas wages are taxed higher (64% in my case)
(24 February 2012, 07:07PM) Complain about this comment
Dr Ray. Do you think the top earners pay enough tax?
(24 February 2012, 07:09PM) Complain about this comment
#13 Dr Ray. I am no Socialist but I simply do not accept that those earning more are necessarily "cleverer" or work harder. It is far more to do with the uneven playing field that Rick cites. I have no beef with with decent Barristers and Doctors making say £200,000 pa . Once they've paid 10% to a pension their overall tax bill is just 33% as only £30k attracts the 50% rate.Not sure where you get 64% from but remeber a higher rate pertains to those who earn say £15000 and lose WTC or £43000 and lose Child Benefit. You have a bad case of the selfish gene.
(24 February 2012, 07:22PM) Complain about this comment
Ellen, some high earners certainly don't as the example of Tony Blair above illustrates. For others being left with just a couple of million a year might limit what they can spend on a yacht but I don't have too much sympathy. For the vast majority of wage earners on maybe three or four times average wage the amount of tax is outrageous and I feel we are being well and truelly rogered. I used to earn some extra money running a business on top of the 60hrs a week of paid employment I do but I found it was just not worth the effort any more and closed it down. As well as the tax on my current income I am also suffering loss of savings and reduction in pension and will need to pay for the full cost of my childrens higher education (and some) whereas less well paid individuals or those on benefit have not had any of these hits so the 50p tax rate is only the tip of the injustice
(24 February 2012, 07:23PM) Complain about this comment
Dr RayYour comments show a level of envy typical of socialists generally. ----------------Do you ever suppose that people are not envious, rather that they seek an equitable world? Hhm? I'm guessing such a bizarre idea would never cross your mind, would it?There are millions of standard-rate taxpayers whose taxes are going to prop up banking and the bloated housing market it has caused. Therefore, their taxes are used to ensure that house prices will never be affordable to them. Seem to you fair, or is this just the jealousy bug being aired?I wonder if people like you ever stop to consider why people become nurses. If they are all thinking of money, it can only be that they are too stupid for anything else.
(24 February 2012, 07:26PM) Complain about this comment
RayI've learnt to live with the 64% higher tax rate.-----------Go on, explain it? I am curious.
(24 February 2012, 07:40PM) Complain about this comment
@ Dr RayI have no reason to be envious; contemptuous, yes.
(24 February 2012, 07:51PM) Complain about this comment
@borisI was commenting on my marginal rate not the average. Your examples flip from one to the other. A wage earner will also pay NI and above 100k will also lose their personal allowance (and child benefit). Someone earning anything above £150k has these extra taxes added on to the 50p rate. To add insult to injury, the last time the personal allowance was increased the threshold for 40% tax was lowered so that the 40% tax payer wouldn't benefit but those on 113k and above don't have a personal allowance so just ended up paying 40% on more of their income
(24 February 2012, 07:56PM) Complain about this comment
I think Roberto and Critic that you are being a bit unfair. Dr Ray is not super rich, just pretty well off and probably pays all his taxes. MSW has pointed out that the contested 26k limit on welfare needs 35k gross earnings in the job market. Pensions are being plundered to pay for what the super rich (at one end) and the lazy (at the other end) have been doing. And putting a child through uni is going to cost 80k - certainly not a financially motivated decision as the only person who doesn't benefit financially is the parent. (I have children). And there is always an open cheque book for the poor and a good accountant for the rich. I don't think the rich pay nearly enough but I think it's almost impossible to get them to do so. And I don't think we are talking about Dr Ray.
(24 February 2012, 08:02PM) Complain about this comment
@ RobertoI was born to unskilled immigrant parents and went to state schools in poor parts of London in the 50s and 60s. I learnt English after starting school but managed against the odds to get a place at University and qualified as a doctor and am now a consultant. What you are confused about is the difference between "equality" and "equal opportunity". Imposing equality on people who are patently not equal is an injustice. Denying equal opportunity to people to reach their full potential is also an injustice. If you get "equality" and "equal opportunity" mixed up (which you have) you commit a double injustice.
(24 February 2012, 08:26PM) Complain about this comment
#10 Boris you have a narrow definition of what makes a wealth creator. I work in a company, where if I don't hit my numbers in one or two quarters, I'll get fired. That's the way it is. I create wealth for the shareholders.It's offensive to suggest that everyone who's worked hard to get to a position where they can earn over £150k has their snout in the trough. I have no family money behind me and everything I have, I've worked hard for. I know of two CEOs in our group who started on the shop floor - no degree, no rich parent backgound, just intelligence, lots of hard work, a bit of luck, but a lot of drive. I notice that you fail to address my question as to why the state has any moral right to take more than 50% of any money I earn?Perhaps you like the 50% tax rate because, like many British people, you don't really like success and want to punish everyone who is financially successful?
(24 February 2012, 08:31PM) Complain about this comment
Dr Ray has us properly confused now. Please tell us which bit of your the income you say is 4 times average has a marginal rate of 64% tax? Four times average pay is approx £135,000. As you lose the personal allowance above £115,000 that person (it could be you) would pay 20% on £37,500 and 40% on£97,500 along with 10.4% Nics on the first 37,500 and 2% on £90,000 a total of just over 38% not allowing for tax free pension contributions. The bit between £100,000 and £115,000 subject to withdrawal of allowance means an extra £7500 gets taxed at 52% or said person pays £3900 more than in the profligate days of Blair.
(24 February 2012, 09:02PM) Complain about this comment
@ Boris. I really admire your ability to confront... and if you can do it in person, you could be a great leader. But you really have the wrong target here. This 50% tax is to hurt the middle class and I am glad Dr Ray is here, because he is at the top end of that. But there are people making a great living out of this country without putting anything back in. People with unimaginable wealth. If the exchequer's take less than the 20%, suggested by alex (no 2), this 50% would be irrelevant. And this top end freeload as much as the bottom end. You and I, almost certainly, have more in common with Dr Ray than you realise.
(24 February 2012, 09:08PM) Complain about this comment
It's a great shame that some people can't be content even if their net household income is less than, say, £100K/annum.Just look at how higher incomes have exploded in real terms since the mid 1990's. If they were justified we, as a nation, would be properly solvent. As it is, most of these higher incomes are effectively being serviced by the country running deeper and deeper into debt and by the lesser well off being made even less well off. And despite the economic catastrophe higher incomes have unashamedly and unabatedly been increasing. Most of these higher incomes are not justified; you don't have to be clever to see that; you have to be selfish not to see it. In order to be contentious, I say carry on with the 50p rate but plug the tax avoidance loopholes.
(24 February 2012, 09:59PM) Complain about this comment
#25 Ellen. I disagree. Too many people compare upwards. Far too many defend the very rich because they have wrongly believe they too will one day be successful and rich, despite the odds being heavily against it. The 50p rate only affects 2 to 3% of the population, so as an attack on the middle class is a bit lame. The vast majority of the middling sort earn between £30 and £75k. No, it is designed to send a moral signal that massive burgeoning salaries out of all proportion to ordinary folk are not acceptable. To actually lose half your pay in tax ,you need to earn £1.3million a year. That's a lottery win to you and me.
(25 February 2012, 11:08AM) Complain about this comment
Lots of talk about making pension contributions to lower the tax paid, but I can't see anything that points out pension contributions are capped at £50,000/year now albeit with a bit of carry back available for a while. And the government is clearly moving towards only letting standard rate tax relief apply. Whooppee. As a fairly high earner (due to working 12 hours a day, 7 days a week on more occasions than I care to remember) I'm not rich - I shop at Tesco's and drive a Mondeo - and I really really resent the government raiding my income to waste on useless schemes and unearned welfare payments. I even more resent the stupid salaries paid for failure (bankers anyone) and how all the current debasement of my savings is taking place to bail out the banks. It makes me so angry...I'm getting screwed but I'm not rich. Now back to work. Maybe a day off tomorrow?
(25 February 2012, 04:53PM) Complain about this comment
I find the invective of Boris MacDonut hard to follow. The UK is now telling expats load and clear that if they come here, they can look forward to Scandinavian tax rates without Scandinavian public services. That strikes me as a very bad bargain and the key point is that it will deter people from coming here in the first place. That is a big issue for the UK whereas the semi-repressed essentially socialist countries of Scandinavia have never sought to entice expats to go and live there. Boris is also very clear that the 50% rate is a badge of Nick Clegg's fabled "fairness". I tend to see it as one facet of the present Government's commitment to confiscating private sector assets. Would this be the same Boris who seems an uncritical supporter of the rampant house price inflation and the buy-to-let scam which have created vast, unearned untaxed rewards for a favoured minority at the expense of the rest of soceity, especially the young?
(25 February 2012, 07:02PM) Complain about this comment
#29 Not sure where I ever expressed support for rampant house inflation or BTL. I only ever commented on how the housing market gained in the past 50 years and is likely to do in the next decade.People fail to see the reality of the 50% tax rate. It is simply part of a progressive tax system where those on £10,000 a year pay 11% in tax and Nics while someone on £1.3million pays 50% and everyone in between pays gradually more. Those that gripe about not being able to cope on half of £1.3 million get little sympathy ,especially as they will have had the same amount the previous year. Be proud to pay so much to help your fellow man.
(26 February 2012, 08:53PM) Complain about this comment
Those successful professional people, who were not born with silver spoons in their mouths, should not be begrudged their high incomes. They should pay reasonable taxes, but no marginal rates of over 50% please. Likewise honest self-made businesspeople who have had the acumen to build profitable companies from nothing.But the FT-SE 100 CEs who have taken huge annual salary rises (49% on average this year) plus bonuses, whilst their company shares remain below the level of 12 years ago, are riding on an undeserved gravy train. We investors in their companies through ISAs, pension funds, unit trusts and nominee shareholdings should be able to vote on their remuneration. But we cannot, because the managers of our shareholdings are on the same gravy train and will not prevent the looting.
(26 February 2012, 09:35PM) Complain about this comment
Everyone should be entitled to keep at least 50p of every extra £1 they earn. A flat rate of income tax would achieve this, but with a much higher tax-free personal allowance, perhaps near the average income level of around £25,000. Above that starting point all income would be taxed. There would be no tax breaks beyond expenses wholly and necessarily incurred in doing the job. Realised capital gains would merely be added to income. The flat rate might need to be 40%, or 50% in a national emergency, to yield the same revenue, because it would subsume national insurance contributions. (I am retired and would take a hit there.) But the marginal rate could never exceed 50%. At the lower end of the income scale, the poverty trap should be addressed so that benefits and income support are withdrawn gradually, with no-one losing more than 50p on any additional £1 earned at any income level.
(26 February 2012, 10:16PM) Complain about this comment
@Boris 30.We aren't helping our fellow man. We're p****ing money down the drain.
(26 February 2012, 11:05PM) Complain about this comment
#33 DJ. Sour grapes. Pouring money down the drain indeed. Taxes pay for hospitals, schools ,roads, nice parks ....all the infrastructure that adds even more value to your big house.Or is that not pouring? I note a fourth asterisk, perhaps you meant piddling.
(27 February 2012, 09:02PM) Complain about this comment
The simple fact is if a 50% rate results in less tax raised it is a bad thing for everyone. Also as taxes go up it will act as a disincentive to work and encourage people look for ways to avoid paying it.If you earned 100k would you look to work even more hours knowing the marginal tax you pay could be over 60%? Some may - many will not.
(01 March 2012, 11:11AM) Complain about this comment
#35 Barkingmad. I disagree. The 50% rate is good. I believe there should also be a 60% rate on income over £500,000 . Where is the magic rate at which the rich decide to just pay taxes and not seek to avoid them? The recent Barclays shenanigans were designed to avoid tax at just 14% after taper relief. It seems there is a wealth point at which many simply feel they no longer have a moral obligation to contribute. You don't really think reverting to 40% would end tax evasion do you?
(08 March 2012, 10:47AM) Complain about this comment
If the 50 p tax band is so easy to avoid then why are the rich complaining? Why do they care what the higher rate is?I feel they protest too much
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