The Lemon Fool

Spring Statement: Is this really the biggest personal tax cut for 25 years?

Taking together the effect of changes to personal taxes and business taxes, the Office for Budget Responsibility says that the government's tax take will rise to 36.3% of GDP by 2026-27.
This would be the highest amount of tax in relation to the size of the economy since the 1940s.

AiY(D)

The big issue and the one that bites hardest in a high inflation scenario is the freezing of thresholds.

The freezing of tax thresholds for four years from 2021 will really bite over the next few years and will make the 1p off the basic tax level unlikely to make up the difference.

John

redsturgeon wrote:The big issue and the one that bites hardest in a high inflation scenario is the freezing of thresholds.

There's an implicit assumption that wages, salaries and pensions will increase with the prices thereby oncreasing the tax revenue as more people cross tax thresholds. That's npt automatic for those without the economic or political power to force through increases in what they are paid.

A purportedly tax curring Government should have targets for the percentage of tax payers in higher rate brackets and stick to them.

Alaric wrote:

redsturgeon wrote:The big issue and the one that bites hardest in a high inflation scenario is the freezing of thresholds.

There's an implicit assumption that wages, salaries and pensions will increase with the prices thereby oncreasing the tax revenue as more people cross tax thresholds. That's not automatic for those without the economic or political power to force through increases in what they are paid.

A purportedly tax cutting Government should have targets for the percentage of tax payers in higher rate brackets and stick to them.

There is no way this is a tax-cutting government. Boris prefers to spend to boost his popularity. Sunak says some of the right things but there is no boldness in his ideas and a lousy 1% off income tax is trivial.

Luckily for the TLF demographic, the tax burden has been spread out more broadly, whilst investment income is relatively benignly taxed. But so much more could be done.

Lootman wrote:

Alaric wrote:

redsturgeon wrote:The big issue and the one that bites hardest in a high inflation scenario is the freezing of thresholds.

There's an implicit assumption that wages, salaries and pensions will increase with the prices thereby oncreasing the tax revenue as more people cross tax thresholds. That's not automatic for those without the economic or political power to force through increases in what they are paid.

A purportedly tax cutting Government should have targets for the percentage of tax payers in higher rate brackets and stick to them.

There is no way this is a tax-cutting government. Boris prefers to spend to boost his popularity. Sunak says some of the right things but there is no boldness in his ideas and a lousy 1% off income tax is trivial.

Luckily for the TLF demographic, the tax burden has been spread out more broadly, whilst investment income is relatively benignly taxed. But so much more could be done.

For a start abolish the licence fee tax. Make it a subscription so people can choose what to spend their money on.

scrumpyjack wrote:For a start abolish the licence fee tax. Make it a subscription so people can choose what to spend their money on.

I don't mind the licence fee.

It does grate somewhat spending £976 tomorrow taxing 2 cars and a bike with a combined age of 71 years for occasional leisure use. Which is more than I spent on fuel for them last year.

redsturgeon wrote:The big issue and the one that bites hardest in a high inflation scenario is the freezing of thresholds.

The freezing of tax thresholds for four years from 2021 will really bite over the next few years and will make the 1p off the basic tax level unlikely to make up the difference.

John

Up to a point, Lord Copper.

But bearing in mind that the income tax threshold more than doubled under the Coalition, how could it possibly account for the burden now being higher than in or before 2010?

I find it hard to believe in any case. I remember in my first professional job in 1983, paying 34.2% of my very modest salary in PAYE alone. That's already pretty damn close to that 36.3%, and was - then as now - just one of many taxes we had to pay, despite Thatcher having reduced the tax burden from 1970s levels.

UncleEbenezer wrote: I remember in my first professional job in 1983, paying 34.2% of my very modest salary in PAYE alone. That's already pretty damn close to that 36.3%, and was - then as now - just one of many taxes we had to pay, despite Thatcher having reduced the tax burden from 1970s levels.

I do not recall the detail now but the Thatcher tax cuts presumably targeted those who had previously been the most over-taxed i.e. those paying income tax rates up to 83% in the 1970s. (Increasing to 98% for the dreaded "unearned" income tax surcharge).

My first job out of University was in 1975 and my marginal rate of income tax then was 35%, or almost exactly the same as yours in 1983. I didn't see any real benefit from Thatcher's tax policies until I earned more and moved into a higher tax bracket. When PEPs came along in 1987 they helped a fair bit too. But again that was a slow, cumulative effect and most of the tax savings were derived in the later years.

Of course VAT and NIC rates all increased over this period, so the income tax savings were partly clawed back in other ways.

Lootman wrote:

UncleEbenezer wrote: I remember in my first professional job in 1983, paying 34.2% of my very modest salary in PAYE alone. That's already pretty damn close to that 36.3%, and was - then as now - just one of many taxes we had to pay, despite Thatcher having reduced the tax burden from 1970s levels.

My first job out of University was in 1975 and my marginal rate of income tax then was 35%, or almost exactly the same as yours in 1983..

That wasn't a marginal rate, it was an overall rate on the total. Though I don't recollect the exact breakdown between the various components of the tax: I think it was (as now) a mix of the components labelled income tax and NI.

I remember the overall figures well. £555/month gross, £365/month net after PAYE was deducted. And being in central London, most of the £365 went in rent. For a "licence" (no tenancies) to live in a slum room.

I recall basic rate income tax at 33%.
And inflation at 20%+.
Mortgage rate 15% and rising.
Those were the days.

Mind you, divis untaxed. If I'd had any.

V8

I recall Income Tax at 2/=, 4/=, 6/= and 8/3d, with NICs a fixed weekly stamp. Also marriage and childrens' allowances on top of the personal allowance. Mortgage interest was tax deductible and Life Assurance premiums came with partial tax relief.

I am going back to the 1950s, though, and the days of Supermac.

TJH

Hi All.

It may be an unpopular view, but it seems to me that taxes need to increase. So, I'm just hoping they do so in as progressive and least damaging a way as practical.

If everyone is complaining at Sunak, he will probably have done things approximately right - but it will be as much art as science - who can measure the Laffer Curve, for example!

As an aside, where people are talking about the effects of tax thresholds earlier, I assume they are referring to what I would call "bracket creep"?

Regards, Newroad

Newroad wrote: who can measure the Laffer Curve, for example!

Actually it has been extensively studied. Most of what I have read indicates that the Laffer sweet spot is around 40%. Above that and people start avoiding or evading taxes, or just working less.

In that context it is perhaps significant to note that Reagan lowered the top US federal income tax rate to 39.8% and Thatcher lowered ours to 40%

Coincidence? I think not.

Hi Lootman.

I'm not sure that constitutes measuring it - though would be interested in a link to any authoritative source. However, it wouldn't surprise me if 40% were about right - my anecdotal take is that people probably start thinking it's unfair once it crosses the 50% barrier (i.e. they're paying more than half their earnings in tax).

However, I have seen some work which suggests as high at 70% might be best for revenue optimisation (presumably the point in context - though different from the concept of an "optimal tax rate"). Equally, other efforts (e.g. Reaganomics) have gone the other way and undershot that level significantly - with arguable success.

Regards, Newroad

Newroad wrote:Hi Lootman.

I'm not sure that constitutes measuring it - though would be interested in a link to any authoritative source. However, it wouldn't surprise me if 40% were about right - my anecdotal take is that people probably start thinking it's unfair once it crosses the 50% barrier (i.e. they're paying more than half their earnings in tax).

However, I have seen some work which suggests as high at 70% might be best for revenue optimisation (presumably the point in context - though different from the concept of an "optimal tax rate"). Equally, other efforts (e.g. Reaganomics) have gone the other way and undershot that level significantly - with arguable success.

Regards, Newroad

I think the 40% idea is that people can tolerate the government taking that much because it is still less than half. Once the government starts taking a half or more, then people lose any moral purpose behind not fiddling the system.

And 40% is still a lot, especially when like with IHT it is on total worth rather than just transactional value.

Hi Lootman.

Sounds like our instinctive views are roughly in alignment. Doesn't make them right though (though perhaps slightly increases the chance of them being so - a bit like measuring the weight of the proverbial village cow).

Regards, Newroad

Lootman wrote: However, it wouldn't surprise me if 40% were about right - my anecdotal take is that people probably start thinking it's unfair once it crosses the 50% barrier (i.e. they're paying more than half their earnings in tax)..

is there another effect, which we've been seeing for the last thirty years or more? That is that nominal salaries xan be increased to astronomic levels, BBC presenters, CEOs etc. When tax rates were 85% etc, did that not encourage those in a position to dictate their remuneration package to take it in soft forms such as non-taxable perks?

Alaric wrote:

Lootman wrote:However, it wouldn't surprise me if 40% were about right - my anecdotal take is that people probably start thinking it's unfair once it crosses the 50% barrier (i.e. they're paying more than half their earnings in tax)..

is there another effect, which we've been seeing for the last thirty years or more? That is that nominal salaries xan be increased to astronomic levels, BBC presenters, CEOs etc. When tax rates were 85% etc, did that not encourage those in a position to dictate their remuneration package to take it in soft forms such as non-taxable perks?

My understanding is that when marginal income tax rates were 60% or more, then it was routine for people to hide or offshore income, or otherwise find 101 ways of frustrating the taxman.

Which is why nobody was surprised when the revenue take actually went up when Reagan and Thatcher slashed the tax rates. Who could have predicted that?

Lootman wrote:

Alaric wrote:

Lootman wrote:However, it wouldn't surprise me if 40% were about right - my anecdotal take is that people probably start thinking it's unfair once it crosses the 50% barrier (i.e. they're paying more than half their earnings in tax)..

is there another effect, which we've been seeing for the last thirty years or more? That is that nominal salaries xan be increased to astronomic levels, BBC presenters, CEOs etc. When tax rates were 85% etc, did that not encourage those in a position to dictate their remuneration package to take it in soft forms such as non-taxable perks?

My understanding is that when marginal income tax rates were 60% or more, then it was routine for people to hide or offshore income, or otherwise find 101 ways of frustrating the taxman.

Which is why nobody was surprised when the revenue take actually went up when Reagan and Thatcher slashed the tax rates. Who could have predicted that?

Marginal tax & NI rates are 62% now between £100-123k earnings, with the withdrawal of personal allowances.

TUK020 wrote:

Lootman wrote:

Alaric wrote:

Lootman wrote:However, it wouldn't surprise me if 40% were about right - my anecdotal take is that people probably start thinking it's unfair once it crosses the 50% barrier (i.e. they're paying more than half their earnings in tax)..

is there another effect, which we've been seeing for the last thirty years or more? That is that nominal salaries xan be increased to astronomic levels, BBC presenters, CEOs etc. When tax rates were 85% etc, did that not encourage those in a position to dictate their remuneration package to take it in soft forms such as non-taxable perks?

My understanding is that when marginal income tax rates were 60% or more, then it was routine for people to hide or offshore income, or otherwise find 101 ways of frustrating the taxman.

Which is why nobody was surprised when the revenue take actually went up when Reagan and Thatcher slashed the tax rates. Who could have predicted that?

Marginal tax & NI rates are 62% now between £100-123k earnings, with the withdrawal of personal allowances.

A lot less than the 83% and 98% rates that prevailed in my youth, and over 100% one year due to a retrospective surcharge. Those rates applied to taxable income over £2,000. The current rates are bliss compared to that! As was found when they eventually lowered those rates, far more tax was raised when the rates were much lower.