Wednesday, 7 September 2011

Thoughts on 50% Income Tax

There has been much coverage this morning about 'additional' rate of Income Tax - 50% charged on earnings over £150,000. Twenty economists have written to the Government, urging them to drop the tax. Typically, the argument has divided along Left-Right lines - Leftists saying that it would be unfair to cut a tax on the rich when poorer people are struggling, and the Right saying that it is manifestly unfair to take half of someone's income.

So, I'll throw a few of these myths out the window.

Firstly, the charge laid by the Right that it is unfair to take half of someone's income. That is true - it would be unfair. However, that is not how the 50% tax rate works. It only applies to earnings in excess of £150,000. Therefore, if you are earning £200,000, you pay £8,495 in Basic Rate Income Tax, plus £43,010 in Higher Rate Income Tax, plus £25,000 in Additional Rate Income Tax. So your total Income Tax bill is £76,505, which represents 38.25% of your income. Not half. Admittedly, this calculation does not include National Insurance.

Secondly, Leftists have argued that it isn't fair to cut a tax paid only by the rich when poorer people are struggling. That may be, but poorer people are always struggling. If you go by that logic all the time, taxes on the rich would never be cut, only increased to fund breaks for those less fortunate, and they would leave the country, leaving us with virtually no tax revenues at all. What is required is empirical thinking.

Let us consider a hypothetical situation - an organisation writes to you, and demands for no reason at all, that you give it over a third of your income, otherwise it will terrorise you, steal your property, and forcibly imprison you. You would no doubt be outraged at this attempt at extortion, and immediately contact your solicitor and probably the police to resolve the issue.

Unless, of course, that organisation was Her Majesty's Revenue & Customs. What makes HMRC different to any common blackmailer or extortionist? Well, they have legal authority, and the money is (supposedly) dispensed according to our democratic will. Apart from that, they are no different.

The Taxman, yesterday

So, therefore, as HMRC is an extortionist working at the Government's behest, revenue is effectively protection money extorted from people. Taxes are a means to raise this revenue. There is no such thing as a moral tax - taxes are inherently unfair. The only justification for a tax is that it raises revenue which can be used by the State to protect our society, and be dispensed in accordance with our democratic will.

If a tax does not raise revenue, it serves no purpose whatsoever, and should be dispensed with immediately. It is simply taking money off people for the sake of it. Let us be clear: the indications are that this tax actually costs the Exchequer money. This is an economic phenomenon that many people struggle to grasp: that it is perfectly possible to reduce the rate of tax, and the actual amount of money generated increases as a direct result, because people don't go out of their way to avoid it.

So my proposal? If this tax is costing the Exchequer money, it should be scrapped. And the extra money that scrapping it generates should be used to increase the Income Tax Personal Allowance. Therefore, everyone who should benefit, does benefit.