Why is a tiered income tax rate "fair"

[philg]

This is something that has always bemused me - the principal that it is fair for higher wage earners to pay higher rates of tax?

I'm happy with the idea that higher earners PAY more tax, but the idea that the RATE of tax increases as your income does ensures that higher earners pay proportionately MORE tax

For example

Using round numbers (they are easy), most people get a tax free allowance of some £6,000

Then, someone on £36,000 (the highest income to still get 20% tax) pays £6,000 on their marginal £30,000

Someone on £66,000 (assuming a flat 20% rate) would pay £12,000 on their marginal £60,000 - twice the salary (roughly) and twice the tax - Fair enough

But it's not like that

The £66,000 earner pays 40% on the final £30,000 - that's £12,000 tax. Making a total annual tax bill of £18,000

Twice the salary - THREE TIMES the tax

It's hard to see that as "fair" in any sense of the word - unless fair means "you earn more than me so I'm going to make sure you pay much more tax than me"

My anger at this reached a head when I was made redundant (at 50) last year and discovered that I ended up paying 40% tax on most of my redundancy payment - That felt VERY fair believe me

[Skyline D]

That's an extraordinary generous redundancy payment you got if you paid 40% tax on MOST of it. That means it was at least £60,001.

In the real world very few people get anything close to half that as redundancy.

Of course the theory of tiered rates of tax is that those most able to pay should pay a greater share. I can see both arguments to be honest. Inevitably with these kind of things your point of view is somewhat biased by your own situation.

[buildersmate]

The way to prevent getting stuffed like that would have been to have deposited all redundancy payments over the £30k tax-free amount into your pension, then draw as much as you wanted (subject to the 25% rule) back out as cash when you start drawing your pension. But it is probably too late now.
Your question is precisely why I now dedicate my time to ensuring virtually every service I need I do myself, having created more time for myself by resigning from the life that paid a high salary, on which I paid stupid sums of tax - only to see it go back out again on buying services I had no time to do myself.

[philg]

and let's face it ".....those most able to pay should pay a greater share." is also dependent on your point of view

Earning more money does NOT equate to an ability to pay more tax - it equates to wanting a BETTER LIFESTYLE for ones family and in most countries of the world is an asprirational target not a target for envy :(

[Skyline D]

"Earning more money does NOT equate to an ability to pay more tax"

Well no actually, that's exactly what it DOES do. Now you can argue that you shouldn't have to if you like, as I said I can see both arguments, it's not a right or wrong question, but there's no doubt that someone who earns more money quite clearly does have an ability to pay a greater percentage of tax and still have money left for essentials.

[philg]

Does that also depend on what you mean by "essentials" and how much those essentials (even if we agree on what they are) are costing?

My point being that as your wages go up, so does your tax

Double your salary - Double your tax

Seems fair

What does stick in my throat is when the tax I pay increases FASTER than my wages

[Old_Geezer]

Yes it is fair that someone who has attracted a larger slice of society's wealth to themselves should contribute more to the general kitty. They got most out of society, they have most incentive to retain the environment they did well in. And they can afford to pay a higher rate since they have more disposable income after needs (however defined) have been covered.

And it makes for a fairer society since the lowest paid and the highest paid can work equally hard, and yet the differential between them is enormous. That is what is hard to see as fair in any sense of the word. Higher rates tackle that inequity. #It is a single rate that would be unfair, it would just encourages the, "I'm all right Jack", attitude that society suffers from every now and again.

Everyone wants a better lifestyle. Higher rates of tax doesn't prevent that as an aim since a higher gross income equates to both a higher net income and a higher tax rate. At the highest levels of gross income the income should not be the incentive any more anyway, what is likely to drive you is the ability to achieve non-income related aims.

I think tax on redundancy payments may be considered a special case since it is supposed to be compensation for the loss of your job, and not normal income. So it would be a separate discussion.

[New Judge]

Quite so. But why should they?

By my (very quick and rough) reckoning somebody earning £20,000 p.a. would pay approximately £4,275 in Income Tax and National Insurance (which is simply Income Tax by another name) – 21.4%. Somebody earning £200,000 would pay £75,689 – 37.8%. This is very close on twice the rate and EIGHTEEN times the absolute amount.

Is this “fair”? Does the higher earner consume twice as much goods and services provided by the State? Very doubtful, if anything he probably uses far less. Bear in mind too that the cash he is kindly allowed to keep is taxed almost every time he spends any of it. Interest on income from any of it he may invest is taxed. And he has almost eight times the disposable income as the lower earner to suffer this taxation.

If it is to be “fair” (a word the current government is very keen on) the taxation system should actually ensure that those on higher incomes should actually pay proportionately less in income tax as they pay far more in indirect taxes than those on lower incomes.

There is nothing remotely fair about the current arrangements. They are simply a method of taking more cash from those on higher incomes simply because they have it to take.

[buildersmate]

I couldn't agree more, NJ.
But that's hardly an election winner - for any of the parties.
No, far better to maintain the existing strategy - let's continue to soak the relatively rich and continue to make a big deal of how successful one is at doing it - even though it is actually the millions of middle-classes who (by their sheer numbers) make up the vast majority of the income tax take. Oh, and while we are at it, we'll soak the middle classes too until they squeak, given that someone has to fund the current levels of Government borrowing.

[Old_Geezer]

The higher earner doesn't have to consume more services, it is not a relevant aspect. If consumption was a criterion then there would be little point in most taxation, since the argument would be, "Let those who need it find the money to pay for it themselves". The situation is that there are services one agrees needs to be available for all in society, based on ones understanding what is right or wrong. That cerates a communal bill which society covers by demanding all pay in according to their ability to do so. Which I hope I've indicated means higher rates for those who have attracted more leisure wealth.

[philg]

Even setting aside the definition of the statement "They got most out of society, they have most incentive to retain the environment they did well in", another iniquity rears it's head

The higher earners are paying proportionately MORE tax (which seems to be some peoples idea of "fair") BUT as there are fewer higher rate taxpayers than lower rate (or non-) taxpayers, then they get proportionately LESS say in the way society and environment is actually run

Put bluntly, lower rate tax payers get to decide how the higher rate taxpayers extra tax is actually used

[Old_Geezer]

In a democracy, or a society that likes to think of itself as a democracy, it is the majority that theoretically decides such things.

[philg]

Agreed 100%

Hopefully we will get our democracy back later this year

[craft1948]

I'm surprised you paid all that tax on your redundancy pay. I took redundancy in January 2006 and the first £40,000.00 was tax free, so I arranged to be paid the £40,000.00 immediately, and the balance at the end of April in the next tax year when I wasn't working.

[Skyline D]

It would have been £30,000 craft, not £40,000.

Being paid the balance some months later is probably illegal though I've no doubt it goes on. It's certainly illegal if it's purely redundancy. I presume it was dressed up as some sort of consultancy work.

[New Judge]

No it is not illegal. Such payments can be spread over a maximum of three tax years.

[craft1948]

Correct New Judge...........I chose to have mine over 2 tax years but was offered the 3 year option.

[Skyline D]

Ok, let me rephrase because what I posted before was slightly misleading. You can receive the payments over a longer period but you aren't entitled to any additional tax free allowance for redundancy as a result. It's still £30,000 total. Granted there's a potential tax advantage because deferring the second tranche to a new tax year may mean it's taxable at 20% and not 40%.

I read the first post from craft as implying the second tranche was then tax free also but he probably didn't mean that, just that it was cheaper to tax.

Apologies.

[dancecaller]

There are several different ways society could be organised
1. Completely equalitarian. Everyone is given the same 'wage' and expected to work the same hours, since our basic needs for food, shelter and social services are equal.
2. Completely capitalist. You make whatever you can by screwing any sucker you can find. Sell shoddy goods made in sweat shops at high prices.
3. Some mixed system.

1. has been tried and found to lead to beaurocracy, corruption and lack of incentive.
2. seems unfair to most people and the rich may end up spending a large part of their wealth protecting against the starving poor.
3. would seem to be best. Where the exact balance is can be debated. I think that the person who has enough left over after food and shelter to buy a yacht should pay a greater proportion of that surplus than someone who is saving their 'surplus' to buy their first car. Tax free allowances allow all to keep enough for basic needs free of tax - same for everyone. (Needs, not desires). Be thankful you weren't paying tax 40 years ago.

[New Judge]

Fine.

Tell me how a young couple living together can meet their "basic needs" (accommodation, food, water, council tax, and energy at the very least) from their generous combined tax free allowances of £12,950.

[New Judge]

And if you find thata bit tricky, tell me how a single person living alone can fund their basic needs on half that sum.