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

August 26, 2011 12:04 PM

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.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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