In this analysis of the recent tax changes we find something we agree with:
Most of the “stealth tax” comes from freezing the threshold at which employer’s national insurance kicks in. This freeze means employers will have to pay more for each employee. Proportionally it affects the lowest paid the most, ultimately feeding through to lower wages and employment for that group. This alone raises £5.5bn.
Quite so, employers’ national insurance is incident upon the workers’ wages. This means that the combination of income tax, employees’ and employers’ NI leads to a marginal tax rate of over 40%. An over 40% marginal tax rate which applies to those still working part time on the minimum wage. This is not just bad tax policy it’s an outrage and a vileness. Which is why, of course, the personal allowance for all three taxes should be, at minimum, the level of the full year, full time, minimum wage.
If you want the poor to have more money then stop taxing them so damn much.
Not that Advani - necessarily - agrees with our solution but we do agree with his analysis of the incidence and thus the problem.
We have much more difficulty with this idea:
Despite repeated mentions of the former chancellor Nigel Lawson during his budget speech, Hunt did not follow his example and equalise the tax rates on income and on capital gains. Currently, someone earning an income of £1m as an employee will pay 47% tax on every additional pound they earn, and their employer has to put in another 13.8% on top. If they can instead take their pay through a company they own and manage, they can take the money out as a capital gain. This allows the first £1m to be taxed at a rate of only 10%, after which the rate is still only 20%.
No, that’s not quite how it does work. You do not “take out” money from a company as a capital gain. You have to sell in order to make the capital gain. This is conceptually different.
The chancellor could have paired an increase rates with a reintroduction of the inflation allowance for capital gains, reverting to the system we had before 1998, benefiting many people who receive income in this way.
One of the reasons Gordon Brown changed the system was that he thought - rightly or wrongly - that a lower rate without the inflation allowance increased the tax take. To reverse the decision we’d all need to see the actual sums that back up the insistence that he was wrong. Given that CPI is 9,6% presently we think it unlikely to be honest.
Perhaps Associate Professor Advani would like to do those sums for the rest of us?