8/27/2010
Why should the poor pay higher tax rates than millionaires? – Telegraph Blogs
Many pensioners and low-paid families with children have suffered higher marginal rates of tax than millionaires for several years now, so today’s report from the Institute for Fiscal Studies should come as no surprise. They are victims of the maze of means-tested benefits – often disguised as ‘tax credits’ – created by Gordon Brown and they continue to suffer because Chancellor George Osborne has failed to make the moral case for lower and simpler taxes.
As a result, hundreds of thousands of pensioners and low-paid families remain caught in a poverty trap despite the departure of Mr Brown and the election of a coalition government. For every £1 they earn above meagre and arbitrary limits, they are allowed to keep just 30p after the imposition of tax and the withdrawal of means-tested tax credits. So they are suffering 70 per cent tax on incomes as low as one third of national average earnings, while millionaires pay a total of 51 per cent income tax and National Insurance Contributions (NICs) on earnings above £150,000.
Regular readers will be familiar with the mathematics because I have been banging on about this since the Budget of March, 2007. Here’s one example of how the poverty trap works. Anyone entitled to claim tax credits – and that includes nearly half of all pensioners – whose annual income exceeds about £7,000 (believe it or not, neither HM Revenue & Customs nor the Department for Work and Pensions could tell me the precise figure when I called to check) has some of their state benefits withdrawn through a means test.
To be precise, claimants lose 39p of tax credit for every £1 of income above that limit. Then, like anyone earning more than £6,475 a year – the current personal allowance – they must pay National Insurance Contributions (NICs) at 11per cent.
Plus, to put the tin lid on it, like everybody whose income exceeds their personal allowance, they must now pay 20 per cent income tax instead of the 10pc they paid on the first £2,230 earned in the last fiscal year before Mr Brown cut off the bottom rung of the tax ladder. So, total deductions from the top slice of their earnings are 39per cent, plus 11 per cent, plus 20 per cent – or a total of 70per cent.
Don’t take my word for it, these calculations were first pointed out to me by Mike Warburton of accountants Grant Thornton and are now generally accepted among people numerate enough to see through the haze of fiscal prestidigitation left behind by Mr Brown, which Mr Osborne has yet to dismantle.
When urging the then-shadow chancellor to adopt a more vigorous approach to explaining the benefits of letting us keep more of what we earn, I quoted Jos Dalrymple, head of private client tax at accountants Smith & Williamson, who pointed out before the election: “Under the current tax system a lower income working family could suffer deductions of up to 70 pence for each extra pound earned by the working members of the family after taking into account the effects of tax, National Insurance and the loss of means-tested tax credits. This contrasts with deductions of only 51 pence for each extra pound earned by a high earner with salary of more than £150,000.”
Of course, the reality is even worse than that because these calculations take no account of how increased duties on alcohol and tobacco, various stealth taxes on motorists and next January’s Value Added Tax (VAT) rise will hit poor people hardest. The sad fact is that the country is in such a mess that all of us are going to have to pay more tax and take home less of what we earn in future. But it is wrong to make pensioners and poor families suffer most. Mr Osborne must try much harder to dismantle the dismal legacy of Mr Brown.
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