Taxing income: a graph of marginal rates – Adam Corlett
If this graph seems confusing, it’s because it accurately describes taxation of income in the UK. I think there are four key problems and solutions.
- First, while the personal allowance is rising (to £9,205 next year), the National Insurance thresholds lag behind. As I’ve written previously, raising these is more progressive and, so, equalising the thresholds and the allowance must be the priority before going beyond £10,000.
Then there’s the withdrawal of the personal allowance at £100,000. This is identical in effect to a 60 per cent tax rate on income between £100,000 and £118,410. Considering the many 50p rate headlines, it’s almost as if only those able to hire PR firms get the attention of the media and the sympathy of the Chancellor!
We should scrap the allowance withdrawal and extend the 45p rate to all income above £100,000. However, even this would be a tax cut for all involved so we must consider an even lower threshold, or other compensating measures.
Third, there’s the simple observation that tax rates are higher and less progressive than the headline 20/40/45 rates. Taxation should be transparent on principle, but I believe a full merger of NICs and income tax would also help maintain progressivity.
Governments have preferred to increase NICs rather than income tax – the former are now more significant for most – and each change has tended to make the system less progressive. It should cost much more to give an extra £1 to someone on millions than to a minimum wage worker, but those rates will soon be 53.4 per cent and 40.3 per cent, respectively. Lowering taxes for the richest would be tougher if these were the headline rates.
What’s more, the lack of clarity and the pretext of the contributory system have shielded dividend and savings income, capital gains, self-employment and other incomes from being taxed at the same rate as wages. As well as being deeply unfair, this creates tax avoidance and distorts behaviour.
The Mirrlees review from the Institute for Fiscal Studies proposes a rate-of-return allowance for savings and investment, in part to avoid taxing below-inflation returns, but that gains beyond this – accounting for corporation tax paid – should absolutely be taxed at the same rates as wages. This is something to champion immediately.
Other considerations include whether we really want a flat local income tax as another addition to this graph, and what form personal tax statements can take. These will improve the information voters have to work with but should include one’s position in the income distribution: only 3.5 per cent think they are in the top 25 per cent of incomes!
We must push for a more liberal, sensible and efficient tax system. This graph helps show we’re clearly not there yet.
Adam Corlett is a research intern at CentreForum. A version of this article appeared on Liberal Democrat Voice on 7 May 2012. The graph above is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike Licence.