The Imprudent Accountant: 50p tax rate

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A lot of Jeremy Corbyn's policies seem completely mad to me but then so do a good number of those proposed by Theresa May and, if I knew what they were, I probably would feel the same about the views of Tim Farron.

The one that is most likely to excite accountants is the Labour Party's pledge to reintroduce a 50% tax rate for income in excess of £123,000, with the 45% rate cutting in at only £80,000.

This dovetails rather nicely with the party's intention to maintain a corporation tax rate of 20% or possibly increase it during the term of the next Parliament, if they get in, which currently looks unlikely but slightly less than it did a week ago.

I am well aware that many readers will be outraged by these proposals. The argument that amuses me most is the one which says there is no point in raising income tax rates because the rich will not pay them anyway.

This intellectual argument can be followed to an obvious conclusion that there's no point in having tax at all, since people will avoid it anyway. The subtlety here is that despite the high tax rates only the rich had the ability or the nous to run rings around the taxman.

Hundreds of years of experience prove that theory is incorrect since the relatively poor struggled to avoid taxes in the long term, while even the rich make some kind of a contribution and, I would suggest, probably pay a little more when rates are higher rather than lower.

If I understand Labour’s proposals correctly, they will mean that somebody getting £100,000 will pay an extra £1,000 per annum, while a top executive earning £1,080,000 (to keep the number simple) will pay an extra £50,000.

Frankly, in the first case, this might be a little tough but is unlikely to lead to starvation. In the latter case, if someone that rich can't afford it then they need to get themselves a decent accountant. Alternatively, perhaps they should cut down on the hard drugs or accept a lifestyle that is slightly more restricted but hardly compares to a care worker trying to survive on the National Living Wage.

At a corporate level, we're talking about 2 to 3% extra, which cannot hit those making minimal profits all that hard but would not even be noticed by a multinational. Someone cynical like me might even suggest that since their effective rate is likely to be barely 1%, every little helps.

Increasing higher rate taxes should provide additional funds for the health service, education or perhaps public libraries. I doubt that these changes will make anyone emigrate, though they may leave the country for other reasons. What then is the problem?

I would love a reader to present a coherent response to this article, demonstrating why the country will be more prosperous if less tax is collected from the rich.

About The Imprudent Accountant

About The Imprudent Accountant

Someone who should know better, but can't resist the occasional rant about the more exasperating aspects of the accountancy profession.

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02nd Jun 2017 11:38

Nobody likes paying tax, whether they are rich or poor. At both ends of the scale attempts are made to avoid tax altogether - this may be the large corporations legally using the tax rules to their advantage (even though many find this morally outrageous) or the guy on low wages doing some "cash jobs" and hence avoiding tax, and/or restrictions in benefits. I would be interested to know how much "human nature" is taken into account in the economic modelling that suggests how much extra tax would be raised by increasing top rates of income tax or corporation tax, and how the loss of other revenues is calculated.
In your example of the taxpayer on £100k, if he pays £1k extra tax, he has that much less to spend - so surely there is a loss of VAT/petrol duty/alcohol duty/insurance premium tax etc . The headline sounds good, but it can't be that simple?
When the top rate of tax was put up to 50%, I had a client who had previously accepted that paying 40% tax was his contribution and that was ok by him. He objected to the increase (not many are altruistic enough to happily pay more tax) so he transferred the business premises (where his limited company operated from) from himself to his wife, who had no other income. The rental income, previously taxed at 40%, was therefore now partially covered by personal allowance and then taxed at 20%. A net loss of revenue to the Exchequer.
Similarly, companies want to keep making the same profits and paying the same dividends, which I personally don't mind as it helps my pension grow. If you increase corporation tax, that increase will either get passed on by lower dividends or increased prices. I'm not defending this, just trying to be realistic.
I have a lot of clients in the medical profession, who are already feeling hard-pressed from a work perspective. They are relatively high earners and if faced with higher tax, are likely to ask me to review their tax position if they reduce their working hours. Just what the country needs when there is a shortage of GPs! Alternatively they may take early retirement because of the swingeing tax charges some of them are facing this year and last year, because of the quirks of the NHS Pension Scheme. Oh yes, and they already lost their Child Benefit a couple of years ago, so they are paying more, although that isn't such a loud headline as 50% top rate!
The sums are never going to add up to suit everybody and the arguments of right versus left are as much political as economic. You mention extra funding for the health service and education, but there is much as individuals that we could do to reduce that demand and make the funding already in place more effective. Currently, 10% of the NHS budget is spent on dealing with Type 2 diabetes, so I hope you weren't eating a cake when you typed that paragraph. If parents engaged more with the teachers there would be less strain on the whole education system (or so my deputy-head friend tells me).
This isn't exactly the coherent response you requested, just some of my thoughts. Oh, and I thought that the snide mention of hard drugs only demeaned your article, even if it was meant as a cheap jibe.

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By DJKL
02nd Jun 2017 13:49

I frankly have little problem with Labour's proposed rates, I accept their forecasts re recovery are likely somewhat high, but why is that a surprise, most forecasts are overstated re everything.

When complaining re 50% people do have to consider that the successful graduate who gets himself to £46,000 p.a. is paying marginal 40% IT, 2% NI and 9% student loan, effective marginal rate of 51%.

The sentiment from Hamlet is correct, "Something is rotten in the state of Denmark"

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to DJKL
05th Jun 2017 09:43

DJKL wrote:

I frankly have little problem with Labour's proposed rates, I accept their forecasts re recovery are likely somewhat high, but why is that a surprise, most forecasts are overstated re everything.

When complaining re 50% people do have to consider that the successful graduate who gets himself to £46,000 p.a. is paying marginal 40% IT, 2% NI and 9% student loan, effective marginal rate of 51%.

The sentiment from Hamlet is correct, "Something is rotten in the state of Denmark"

You forgot to include auto-enrolment. I know you can opt out and you'll eventually get the money back in the way of a pension (well hopefully) but thats another 1% soon to be 5% to come out of your earnings before you've even received them.

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By DJKL
to Sam Beedle
05th Jun 2017 12:14

I think it drops away re earnings> £45,000 though to tell you the truth have not really looked at this aspect.

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06th Jun 2017 09:48

You seem to have fallen for the leftist mantra that the Government needs to squeeze 'the rich' for even more taxes to fund public services. This is not a fact but a matter of (usually but not always) lefty opinion. What is wrong with cutting spending on say the Arts, housing benefits, welfare or delivering public services more efficiently?
Raising tax rates simply encourages avoidance and drives enterprise abroad with a consequent loss of jobs and tax revenues.
It's hard to think of anything more unproductive for an economy than tax avoidance.
Let's consign 50% tax rates to where they have failed:the past.

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12th Jun 2017 11:38

There is an added complication. Ordinarily raising corporation tax and the top rate of income tax to say 26% and 50% respectively may not in itself force companies and high earners out of the country but adding in Brexit is likely to tip them over the edge. High corporation tax + Brexit = Possible loss of investment and employment.

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