Tag Archives: income tax

The squeezed middle?

Used under creative commons license. Image by 'Images of Money'

Used under creative commons license. Image by ‘Images of Money’

Wednesday sees George Osborne deliver his latest budget speech. Some of it he announced on Andrew Marr’s Sunday morning show, other parts may well have been leaked by the time you get round to reading this (I’m writing this on Monday night).

In his appearance on the Marr show, aside from being fed his lines by the host who had earlier in the show demonstrated a clear and distinct partiality with regards to the Scottish referendum on independence from the rest of the UK, and aside from the fact that there was no serious or penetrating scrutiny given applied to the Conservative party policy, making the Marr Show little more than an extended party political broadcast for the Conservative party; aside from all that, I was struck by something Osborne said as part of his prepared speech.

Whilst speaking of personal taxation, Osborne spoke of the increase in the personal allowance that has taken place since the coalition came into power in 2010.

Before coming to that point though, I would like to note two things: One, the rapid increase of the personal allowance was a Liberal Democrat policy, not a Conservative one. It was a feature of the coalition agreement that the Lib Dems insisted upon. It was one of the few areas where the Lib Dems led and the Conservatives followed.

Secondly, I would add that it is probably the best thing the coalition government have done. I am in favour of lifting the lowest paid out of personal taxation. Ideally, the personal allowance should be at a level whereby no one is taxed whose net pay would not be enough to reasonably live off. The measuring of how much that is a complex matter and one that I shall not address in this blog post.

But the point that struck me was that Osborne was proud that it was reducing the amount of tax paid by the middle-to-high earners. Without getting too personal here, I will say that in my current job, on my current salary, a small part of my tax is paid at the 40% rate. This is an important point. The media will often talk about those who pay the 40p rate (i.e. 40p in the pound, but I prefer percentages for clarity) but they fail to mention that only the uppermost part of someone’s salary is paid at that rate. There is still a significant chunk that is paid at 20%.

As someone who is counted as a middle-to-high earner, am I pleased that the amount of tax I pay is being reduced? No.

Nomatter what your political persuasion, one should face up to the economic fact that we have both a large debt and a large deficit, both of which need reducing. The two essential ways of doing this are to increase revenues or to cut costs. The current government’s plan has, for the last few years, been to cut both revenues and costs, but to cut costs at a much faster rate, through their austerity plan.

Many more voices than just mine will testify to the great damage that the austerity programme has done, with people losing their livelihoods and even their lives as a result of it. In other countries, such as Greece, it has been taken to a more extreme level but has merely resulted in mass unemployment and has failed to live up to its promises.

So while some cuts are necessary (and here I would rather cut spending on Trident and other weapons of mass destruction rather than removing the safety net of social security which is relied upon by many in their hour of need) the more obvious and sensible measure is to increase revenue. Anyone who has studied economics at any level will be familiar with the idea of elasticity of demand. That is, the more you charge for product, the less demand will be. But how much demand falls off in proportion to how prices increase is measured by its ‘elasticity’. Luxury goods have a high elasticity, whereas necessities have low elasticity. Take train tickets for example. Many use trains to get to work. If the price gets bumped up by 5% we don’t get the choice to not go to work. We are forced to swallow it, increasing the revenues of the train companies.

When it comes to tax, part of modern right-wing ideology is that tax is highly elastic. They love to tell us that increasing taxes will deter rich people from coming to country (hey, that’s one way to curb immigration!) or force people to leave. In France, when they raised taxes, a few high profile people did choose to leave the country. But did it cause a reduction in revenue that crippled the country as the austerity measures did to Greece? No.

The truth is taxation is inelastic. This gives rise to the possibility that, as train companies have exploited commuters, governments could exploit all its citizens by unfair taxation. But what is fair? Surely it is in answering this question that differences between left and right become apparent, especially when we consider what our priorities are. Right-wingers such as George Osborne see fairness in prioritising that people keep as much of their gross pay packet as possible. Left-wingers such as me prioritise ensuring the dignity and the livelihoods of the poorest and most vulnerable in society.

For me, as stated once, but to reiterate the point, tax becomes unfair when the net income after tax is not enough to live on. If you have more than enough to live on, then you have enough to be taxed upon. Note that even if there was a flat rate of 40% (which is much higher than the actual effective rate of tax paid by those whose pay comes into the 40% band) then any individual would still keep more than half of their pay packet.

We also need to consider the seasonality of life. For some of my life I was in state education and not earning a salary, not paying taxes. At other times I have been unemployed and had to claim job seekers’ allowance in order to pay for my rent and food. At times like these, I was net taker from the state. At present, I am a net contributor. If I were to take a simplistic, conservative approach, and demand that I only pay tax for the services I use, then I would pay much less tax than I do now. But what about those who are currently in a season of being net takers? The young, the elderly, the unemployed, the disabled? It is to support them that we need a section of the population to pay more tax than the cost of the services the latter use. It is a recognition of this that makes me despise the term ‘the squeezed middle’. I am not squeezed enough.

To turn a phrase around a little bit, I would say: First, to each according to their need. To fund that, from each according to their ability. This is where I think our priorities should lie. The idea of tax for tax’s sake is as wrong as it is to try to separate the payment of taxes from the provision of centrally provided services.

So please George, let’s get priorities straight. For those who are out of the tax system, let’s ensure that there is a living wage paid to those in work, and a firm support net for those who aren’t. For those who are paid in excess of they need to live on, please tax us more. We can afford it.

Some potential measures to improve welfare & unemployment

As you are probably aware, I have been unemployed for the majority the last 6 months. This has given me, amongst other things, some time to watch the goings on at the party conferences in late September through to early October. As a left-wing christian, I fully support the idea that society should look after it’s more vulnerable members, whether they be children, the elderly, the jobless or the disabled. When I post views such as these on Twitter, I often get responses from trolls (or maybe genuine conservative apologists) who sometimes suggest I ought to come up with a perfect welfare system, fully costed, in 140 characters. So in this post, I plan to explore some ideas of how improvements could be made. I am not, by myself, a full government department which ought to be looking at these things, so any figures I use are reasoned estimates.

My first point to note is that job seekers’ allowance (JSA) is not enough to live on. It covers food costs and, when considered on a daily cost basis, utility bills. But it doesn’t cover all the cost of rent or travel to and from interviews. Also, costs of living vary around the country. So it is nonsensical to even ask for ‘a number’ that would suffice for JSA. I have seen no evidence of any costing behind the £71 per week that it currently is.

Instead, I would propose a reimbursement of living costs. That is, make claiming JSA more akin to claiming expenses from an employer. Lay down rules about what can and can’t be reasonably claimed and reimburse when evidence is presented for those claims. For example, for my rent I could present my lease contract, for my travel I could present train tickets and emails confirming dates and locations of interviews, for food I could present a till receipt from Asda.

The second point is about reducing unemployment. I have been to interviews and lost out to people who are moving from one job to another. All this time they are working, gaining experience and making themselves more attractive to potential employers. So it’s a virtuous circle for some, but a vicious circle for others. The longer I spend unemployed, the worse it looks on my CV and the less attractive I am to employers.

So I would I would propose an incentive to companies to encourage them to employ those who are currently unemployed. How would I do this? A tax break. At present, the expense of hiring someone and paying their salary reduces a company’s profits which lowers their tax bill a bit. i.e. if you hire someone on a salary of £30k and have a £5k recruitment fee, in that year you will get a tax benefit of £35k multiplied by the rate at which that company pays corporation tax (which depends on how big their profits are). I would propose that the amount that is tax deductible by increased if that person has been unemployed, the evidence for which would be a P45 from the Department for Work & Pensions (DWP). So as an example, let’s say the multiplication factor is ‘W’. This would be effective for any recruitment costs and the first year’s salary. After that, no additional tax break could be claimed.

At present, for employing someone at a total cost of £35k, the company has a tax deductible amount of £35k. But if they employ someone who has been unemployed for a month, then their tax deductible amount would be W x £35k. The difference is of course, £(W-1) x 35k. If the company pays corporation tax at 24%, then they get an additional tax benefit of £(W-1) x35k x 24% = £(W-1) x 8.4k.

How would this be funded? It would be self-funding as the newly employed person would no longer be claiming JSA and would be paying income tax and national insurance. Assuming there are no complications in their tax affairs, a person on a salary of £30k would pay roughly £4,379 in income tax and £2,689 in national insurance. There would also be a contribution for the employer’s NIC of £3,107. This make a total contribution back to the treasury of £10,175. So by employing someone, even if they were unproductive, that’s what they would contribute. But if they’re no longer unemployed, they wouldn’t need to claim JSA. A year’s worth of that costs 52 x £71 = £3,692.

So let’s work out what W would be to break even.

(W-1) x 8,400 = 10,175 + 3,692
W – 1 = (13,867/8,400)
W = 2.651

So we could in fact give a tax break to companies by allowing a tax deductible amount that is exactly double the actual cost and the net cost to the treasury would be less than the revenues raised.

Of course, this is one example, with many other variations possible, such is the complexity of life. I’ve done some testing for other W figures based on other salaries and they tend to be about 2.3-2.8.

This is not an incentive to create employment, merely a way to encourage companies to take on those who are currently unemployed. It’s not a panacea, but I think it’s a small improvement on what we have now.

I hope I’ve shown that this is an idea worth pursuing. So those are some of my ideas. What measures do you think would help improve the benefits system and reduce unemployment? Please be constructive.