The 50p rate of income tax is unfair. Scrap it
Aug 2011 26

The 50p rate of income tax is unfair. Scrap it15

Fairness is a concept most people rely on when thinking about how to set tax rates and who should pay what. Unfortunately, the quality of information about tax facts in the media is so poor that public understanding is frequently skewed and, as a result, people often argue for changes that contradict their principles.

Last week on Any Questions following a question about Warren Buffett’s call for the rich in the US to pay more tax, the discussion turned to the 50p rate in Britain. Katharine Birbalsingh, the teacher who famously spoke at the Conservative conference last year, made a point about fairness on the 50p rate most would agree with:

The system ought to be fair, it’s not fair if someone earning £40,000 is paying the same rate of tax as someone who’s earning £200,000. It just doesn’t sound right to me. Now, I take the point about wanting to attract people internationally and so on, but then perhaps we need to lower the rate for the ones in the middle and then it doesn’t need to be as high as 50 per cent for the top ones. But it just isn’t right that someone earning £40,000 and £200,000 should pay the same amount of tax. And absolutely I agree with Tim about the loopholes and so on. Clearly the people at the top aren’t paying very much at all and that’s a massive problem but the middle classes, the ordinary policemen and teachers and nurses are the people who pay the bulk of tax in this country and that just isn’t fair.

The first crucial point about people earning £200,000 and others earning £40,000 is that, if you abolished the 50p rate, they would still not pay either the same amount of tax or the same rate. Someone with a £40,000 salary would pay £6,505 in income tax, which equates to 16.3 per cent of that salary. Someone with a £200,000 salary would pay £73,000 income tax, which equates to 36.5 per cent of the salary. Even the marginal rates, the percentage you pay for each additional pound earned, are different: 20 and 40 per cent, respectively. As we go higher up the income scale, this relationship still holds.

Someone earning £45,000 would enter the 40 per cent income tax rate. If the 50p rate were abolished, they would pay the same marginal rate as someone earning £200,000. But they would still pay a much smaller amount representing a much lower rate. The individual on £45,000 would pay £8,010, or 17.8 per cent, compared to £73,000 (36.5 per cent) for the individual on £200,000.

Independent estimates suggest the 50p rate doesn’t raise any money for the Treasury at all, and I’ve discussed the unfairness of hitting people with a tax for no better reason than to make them suffer for the politics.co.uk website. I don’t think most people would think it unfair that someone earning £200,000 paid £73,000 (50p rate abolished) instead of £78,000 (with 50p rate) in income tax when the individual on £45,000 pays £8,010. But most of us do think it’s very unfair to clobber people with taxes that don’t even raise any money.

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  • Anonymous

    A flat rate of 20% is perfectly fair as it is proportional to how much you earn.

    A basic tax rate of 18% on earned income with absolutely no other taxes whatsoever (especially those on savings, companies(as companies do not pay tax, their customers do, inheritance, green, road use, fuel use, energy use…) is fair on everyone. Leave a threshold of £10,000 in place and simply slash the size of the state.

    That’s the fairest solution going.

    • Dave

      I think this is very far indeed from being “the fairest solution going”. However, as it’s exceedingly unlikely to happen, I shall not worry too much.

  • kav

    I am on a wage which is below the national average but I do not think it is fair that someone who earns £200,00 should pay more tax. What entitles the government to take more money from them just because they have chosen to work and study hard and excel in their chosen profession? They arguably use the same (if not less) public services than everybody else and a flat rate would still mean they contributed more than those on lower salaries.

  • Carl

    While I accept the 50% tax rate as being an ‘issue’ I would suggest the biggest issue is avoidance of tax from the super rich and the way taxes are heaped on salaried earnings rather than assets. That is unfair in a variety of ways, not least generationally. It does however suit down to the ground politicians with inherited wealth and the age groups they woo who are most likely to have multiple properties.

    • Orac54

      On the contrary. The tax-avoidance of the super-rich is a red herring. If they don’t like the tax regime, they leave and take their taxes with them. Switzerland, Monaco, Lichtenstein etc are all full of them. 

      You won’t get them to pay more taxes, and everyone involved in setting taxation knows it. That’s why they don’t set the upper band at (say) £1m a year. They want to fleece the ones lower down the scale who can’t move just like that. They’re not “super rich” and they don’t avoid tax. They just pay up, because they have to.

  • Kbirbalsingh

    I still don’t understand. I should not have said ‘pay the same amount of tax’, I should have said ‘pay the same percentage of their salaries’. So yes, of course if you earn more, you’ll pay more money, but you won’t pay a larger percentage. Isn’t this right? Yes, the amount raised by the 50p tax isn’t huge, but that isn’t any reason to abolish it. If it makes the system fair, and it means more money (however little that is) for more textbooks for kids, then why not? The question is whether it makes the system more fair. For your argument to be consistent, then EVERYONE, whatever their salary, should pay the same percentage of their salaries. But as soon as we have a 2 tier system, then I believe it is unfair to only have 2 tiers. It means, especially with the loop holes that exist -  that the really rich end up paying some 15% in tax, and the middle classes are the ones who pay the bulk of tax in this country. And that simply isn’t fair. So the loopholes need to be closed – and I don’t know how that gets done. And I think there should be more than 2 tiers, possibly even more than 3. The system as it is, is unfair and I don’t see how you can argue that it isn’t.

    • http://twitter.com/rorymeakin Rory Meakin

      Katharine,

      Thanks for commenting. The thing is, if you abolish the 50p
      rate, the rich would still pay a bigger percentage of their salaries, like you
      say. The earner on £200,000 would pay 36.5% in tax whereas the earner on
      £45,000 would pay 17.8%. At the moment, the £200,000 earner pays 39%. So
      scrapping the 50p rate would take the £200,000 fellow down from paying 39 to
      36.5% in income tax, that’s still a lot more than the 17.8% paid by the £45,000
      earner. But there’s more to fairness than just this angle. The 50p rate is
      widely thought to raise no money, because the revenue lost from the small
      number of people avoiding it or moving abroad outweighs the small amount of
      extra revenue from those who are still around and paying it. Is it fair to take
      money from people if the process of taking that money loses the Treasury more
      than the money it takes? In other words, is the point of tax to raise revenue
      or to punish people? I take your points about other areas where the tax system ought
      to be fairer, but I don’t think those issues make this one OK.

  • http://www.facebook.com/people/Ian-Scott/1181961351 Ian Scott

    It’s not important how much tax you pay, it’s more important how much you’ve got left after paying.

    That’s what the TPA should be campaigning for – ensuring that work actually pays. It’s actually worth your while to get out of bed and go to a job every day because after you’ve paid your dues to society you can still afford to pay the bills.

    Focusing on people who wouldn’t notice losing £50 down the back of their sofa makes you look elitist and plain greedy.

    • Orac54

      If it’s not important how much I pay, then I’ll pay nothing, thanks. I don’t get much for it, anyway.

      • Blarg1987

        I admit it is very hard to quantify a service which does not produce direct monetary value, e.g. education, health care etc.
        But to say you do not get much for it is hard to say when the only way you will know is if it is lost and we do have a tendecy to loose lots of things and never bring them back.

  • Anonymous

    I think that a lot of the “controversy” is that people don’t understand percentages… this is clear when they ask “why should someone earning 100k pay the same amount of tax as someone earning 200k”. If everyone paid 20% tax rate, then we all pay the same proportion, people who earn more pay more tax, is that so hard to understand.

    I personally don’t measure my wealth by my gross salary, I measure it by my net. I believe that the higher tax bands actually cause pay escalation amongst the higher paid. If a higher-rate tax payer (40%) is due a meaningful pay rise, it needs to be twice as big as someone on the 20% rate.

    My employer operates a salary sacrifice pension system, so I decided to reduce my effective salary below the higher-rate threshold, and to pay the entire amount above that into my pension. To make up the shortfall of net income, I am cashing in a poorly performing ISA. Thus I pay less tax and NI on salary, zero tax on my ISA interest, and those tax savings effectively allow me to get 45%-ish gain on moving my ISA into my penson.

    • Chrishorsfall

      Just like to know why a higher-rate tax payer (40%) needs twice as big a pay rise as someone on the 20% rate. If a lower rate person got a £100 rise they would receive £80 after tax (excluding NI). A higher rate person would need £133.34 to get £80 in their pocket, not £200???

  • http://www.facebook.com/barbara.lockwood3 Barbara Lockwood

    IF some of you think a 50% tax is unfair it’s about time you included pensioners of 80 who are still having 20% deducted because they have a small private pension they fully contriduted to while working and paying INCOME TAX>Barbara  

  • MerlinDragon

    The Spectator CoffeeHouse recently posted that:

    > the top 1 per cent of earners — will > contribute an astonishing 28 per cent of > total income tax this year.

    This seems to be opposite of the claim above that “Clearly the people at the top aren’t paying very much at all”

    I’d be fascinated to know what top percent of earners provide 50% of the income tax.  It would be interesting to see how much the people at the top of the second 50% get paid.

    Then we could prove or disprove the statement “the middle classes, the ordinary policemen and teachers and nurses are the people who pay the bulk of tax”

  • Gd

    more important is why on earth do we start paying tax after only earning £7,465.  This is Crazy when the Basic cost of living is more than £12k. A single unemployed person receives around £11k inc Housing and Council Tax Benefit, and the official poverty level is equivilant to over £12,000 inc housing costs. No one should be paying tax on less than £15k.  There should be at least 5 tax bands. Sod the Sqeezed Middle, what about the Crushed Bottom.