45p is Not the Problem; 40p is the Problem

Monday, 23rd March 2009

I think James and Danny Finkelstein are correct. Political considerations trump the need to satisfy the Conservative party's right-wing. And that means that, regrettably, George Osbourne is probably right not to promise to abolish the new 45% income tax band for the rich. At the very least this should be an aspiration not an immediate priority.

But the problem is not so much the 45p band, but the number of people trapped by the existing 40p band. This has been one of gordon Brown's most successful stealth taxes, drawing more and more middle class voters into his clutches every year. Even this years' widening of the bands does little to redress the matter. The effect is that an awful lot of middle-income earners are paying high-income taxes.

As James wrote way back in October, increasing the 40p entry level to £50,000 ( including the £6K personal allowance) would take more than half a million taxpayers out of the higher band. Coincidentally this could be afforded, more or less, if there were a 45p rate on earnings above, say, £175,000. If that's the revenue-neutral way to do it then I'd say that a significant tax cut for a pretty large swathe of the middle-class is a good idea.

Apart from anything else, arguing that the first thing a Conservative government will do is cut taxes for city bankers does not seem a very sensible strategy at this moment of the political and economic cycles.

The whole tax debate, rather like that of the country's fiscal future, reminds me of the old Irish saw about asking a codger on the roadside for directions only to be told "Ah, well, if I were going there I wouldn't be starting from here." But we are, aren't we?

Filed under: Tax (182 more articles) , Tories (273 more articles)

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Angus Day

March 23rd, 2009 7:42pm Report this comment

Even better, from an economic perspective, would be a flat-rate tax, but I doubt we will see the cameroons proposing that anytime soon...

TrevorsDen

March 23rd, 2009 9:26pm Report this comment

Give the man a coconut.

Congratulations Alex on fighting your way through all the backwoodsmen into the real world.

40p IS the problem. But so too is 20p.

So too are taxes on employment.

And then there is pensions

And the chronic problems in our Armed forces
And ...

Yes - and to think people are getting worked up about 5p

Angus is right ... but a flat tax at the best of times is fraught with electoral danger. At the present ... its time may have to wait until spending and revenue is stabalised.
All other things being equal I favour a big bang break with the past but given present debt levels this seems fraught with all kinds of dangers.

And as Tigger said to Roo ... ''You can't argue with a word like 'fraught' ''

Richard Baxter

March 24th, 2009 12:01am Report this comment

Surely increasing the personal allowance to around £16k would be a more sensible option, one that would benefit earners across all income brackets as well as freeing lower earners from the burden of income tax altogether.

Many people made redundant in this recession, including former high-earning professionals, are now struggling to find jobs paying more than the minimum wage. It's also worth pointing out that the median income in this country is somewhere in the £20k bracket. It's folly to believe that a tax cut which would only affect £40k+ earners would be a massive vote-winner among the public at large.

Paul B

March 24th, 2009 9:09am Report this comment

I agree with the general thrust of all the above posts. Flat tax rates, married to large PA is the future, but it will be impossible to implement until the nations books are in some sort of balance or appear to be heading that way.

Into the quagmire of the tax swamp that needs to be sorted in the future, is NI. That which we call a tax,by any other name would smell as foul. Its a general misconception that NI funds the NHS- it doesn`t. NHS is funded out of general taxation. NI pays pensions and contributory benefits. I ould favour the money went into a fund, which would grow and eventually, at a point in distant future, its income would at least go some way to meeting our childrens and grandchildren state pension needs. That would be a legacy to leave, after all, they are the ones who are going to have to work their bow locks off to get us out the mess this current generation have created.

simple123

March 24th, 2009 10:04am Report this comment

45% income tax bands rise UK? Lower tax band 1/4 less in Germany!

There is now a discussion in UK that the 45% tax band for the high earners is unavoidable, since the money system has not worked.
But what about the lower paid workers? They pay a quarter less in Germany in comparison to the UK. Why???
So, if we introduce new tax bands, we will have 3 tax bands at 20%, 40 % and 45% in the UK and high government debts.
Tax Rates UK 2008/9 (POUND):
Starting rate for savings: 10%* £0-£2,320
Basic rate: 20% £0-£34,800
Higher rate: 40% Over £34,800
Please compare this with Germany 2008/9 (EURO) :
O% Up to 7,664
15% 7,665-52,152
42% 52,153-250,000
45% 250,001 and over
http://www.worldwide-tax.com/germany/germany_tax.asp
As you can see, in Germany (concentrating on the middle class with lower government debts) the tax band for the low income earners is 1/4 cheaper than here in UK.