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Tax simplifier 6: Our marginal tax rate structure has no logic

    This is the sixth blog in a new rolling programme of recommendations for tax simplicity from CPS Tax Expert and Research Fellow David Martin. The 'Tax Simplifier' series aims to make the case for a much simpler tax code with practical recommendations for policy change on a regular basis. Blogs will be published twice per week, on Monday and Thursday. Read David's previous blog on the CGT. You can follow David on Twitter @TaxSimplifier.

    The complexity of our tax rates on income is awful.

    For 2013-14 the basic rate of 20% applies to taxable income of between £0-£32,010, the higher rate of 40% applies to taxable income of between £32,011- £150,000 and the additional rate of 45% applies to taxable income over £150,000.

    The personal allowance begins to be withdrawn where income exceeds £100,000, until it is eliminated where income exceeds £118,880.

    There is also a starting rate for people on low incomes of 10% for savings income between £0- £2,790. There are special rates for dividends - the 10 per cent ordinary rate, the 32.5 per cent dividend upper rate and the dividend additional rate of 37.5 per cent.

    NIC rates for employees are 12% for income between £149-£797 p.w. (£7,748 - £41,444 p.a.) and 2% for income over £797p.w.

    The new rules for withdrawing child benefit will create more effective tax rates. People earning between £50,000 and £60,000 face a loss equivalent to an income tax rate of 10.5% for their first child and 7% for each subsequent child. 

    The repayment of student loans, which can add a further 9% to the tax rate is a further complication.

    Let’s take a simple example of a married man with two children, who has no savings or dividend income, and no student loans. Putting together the above information his marginal rates will be:-

    Total Income - £               Marginal rate

    0- 7,748                                0%

    7,748 -9,440                        12%

    9,440 - 41,450                      32%

    41,450 -50,000                     42%

    50,000 - 60,000                    59.5%

    60,000 - 100,000                  42%

    100,000 - 118,880                62%

    118,880 - 150,000                42%

    Over 150,000                        47%

    This is over the top. For example, people need to be able to work out the financial implications of making additional pension contributions, or salary sacrifice, or taking on more paid work - do we really expect them to cope with this complexity? 

    David Martin enjoyed a career spanning 23 years as a tax lawyer within a large City Law Firm, latterly as Head of the Tax Department, before taking early retirement in 2002. During that time he advised both company and individual clients. He now lives a less pressurised life in Devon with his wife and two daughters and maintains an active interest in tax law.

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    Comments

    Joe Blow - About 2212 days ago

    David

    The calculations as outlined above are far worse in reality. Stiglitz et al have shown that the tax incidence of payroll taxes such as employer NI falls wholly upon the employee, that should and must be included in the figures.


    Joe

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    Lawrence John - About 2210 days ago

    David this is good, but only half the story - there is another >10% for employers contribution to NI, and on top of that, my take home pay suffers an additional 20% for VAT (and far more when I buy fuel, cigarettes or alcohol). Please do the calculations - my figures show that close on 80% of the money that my company budgets for my salary goes to the revenue.

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    Anonymous - About 2210 days ago

    This article reflects the conventional view of how the tax system works, but sadly it is a travesty from top to bottom. All costs and taxes on production accumulate down the supply chain to be finally paid out of consumers' cash which necessarily supports the entire economy. Even food prices, supposedly tax free, contain hidden taxation this way.

    Government deliberately avoids taxing the end consumer directly to the full extent necessary as this would expose the outrageous real tax burden of 50p in every pound spent by each consumer on average. Instead it discreetly collects tax by inflating the costs of goods and services using a variety of so-called taxpayers working in the supply chain, who are selected to provide another means to funnel consumers' money to the Treasury. The great thing is that these 'taxpayers', firmly believe that they pay their fair share of taxation in the process. What better scheme could politicians devise to fool voters about who pays tax, by how much and when, in order to gain political advantage and hide the colossal cost of the state?

    You can continue to believe that imposing a multitude of taxes on every aspect of personal, and joint stock company, industry and commerce does not cause higher consumer prices, but I urge you to think again.

    Our complex tax system is simply a charade, in that voters have no real perspective on what they earn or the tax that they pay. And this fact indicates an absolute corruption of our system of government.

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