Promises promises

[teamsaint]

Now I didn't know that ...

So you are actually saying that at 40% tax rate the tax allowance is effectively doubled? Surely when the tax allowance kicks in everyone is at the 20% rate?

I'm not lucky enough to be earning £60k so I have no first-hand experience of that being the case.

Certainly, there is nothing to indicate such a thoroughly regressive system on the HMRC website!

Exactly.
Imagine a system where you can earn 30 k at 20 % and everything else at 40%.
Total tax bill on a 60k is 18k.

The bill on a 30k salary is £6k.

NOW;
Add in a 10k tax free allowance.
Bill is now 30k at 20% and 20k at 40% for our 60k man, total bill 14 k.

For our 30 k person, bill is now 20k at 20%, total 4k.

So our 60 k person benefits by 4 k from the allowance, but the 30k man only by 2 k.

[french frank]

NOW;
Add in a 10k tax free allowance.
Bill is now 30k at 20% and 20k at 40% for our 60k man, total bill 14 k.

I think that's where your figures break down. The first £10,000 doesn't attract a tax liability - but it doesn't reduce the level at which the higher rate is chargeable.

[P. G. Tipps]

NOW;
Add in a 10k tax free allowance.
Bill is now 30k at 20% and 20k at 40% for our 60k man, total bill 14 k.

For our 30 k person, bill is now 20k at 20%, total 4k.

So our 60 k person benefits by 4 k from the allowance, but the 30k man only by 2 k.

But surely it's 20k at 20% and 30k at 40% for the 60k man ... ?

Or is the tax allowance applied at the top end for 40% tax payers?

[teamsaint]

I think that's where your figures break down. The first £10,000 doesn't attract a tax liability - but it doesn't reduce the level at which the higher rate is chargeable.

My figures are right. The allowance has the effect of reducing the amount payable at the top rate , not the band at basic rate.

Each individual is entitled to
The tax free 10 k.
Next band at basic rate.
Anything else at higher rate.
The allowance reduces the amount payable at the TOP rate.

[teamsaint]

But surely it's 20k at 20% and 30k at 40% for the 60k man ... ?

Or is the tax allowance applied at the top end for 40% tax payers?

Out imaginary taxpayers are allowed 30k at basic rate.
The allowance does NOT reduce the size of the band at which basic rate is payable.it reduces the overall amount subject to tax, within which you are still allowed the full amount at basic rate.

so you get the tax free allowance, £10k.
and THEN:

Tax rate Taxable income above your Personal Allowance

Basic rate 20% £0 to £31,865
Higher rate 40% £31,866 to £150,000
Additional rate 45% Over £150,000

[french frank]

But surely it's 20k at 20% and 30k at 40% for the 60k man ... ?

That's how I would see it: the first 30K would be 10k at 0% 20k at 20%.

[teamsaint]

That's how I would see it: the first 30K would be 10k at 0% 20k at 20%.

that isn't how it works.
I have just posted the latest HMRC figures.

you are making the mistake of thinking that the allowance somehow reduces your basic rate band.
It doesn't.
hence, any increase in the allowance reduces your liability by a similar amount at the highest rate at which you pay.

[french frank]

Full Fact analyses it in a different way

https://fullfact.org/blog/who_benefits_most_Lib_Dems_income_tax_threshold-3310

"From what we have seen, Full Fact has little reason to doubt the calculations used by either side, and both seem to accurately present different sides of the argument. Which side is more useful is for the reader to decide."

[teamsaint]

Full Fact analyses it in a different way

https://fullfact.org/blog/who_benefits_most_Lib_Dems_income_tax_threshold-3310

"From what we have seen, Full Fact has little reason to doubt the calculations used by either side, and both seem to accurately present different sides of the argument. Which side is more useful is for the reader to decide."

Of course, a total picture of income, tax and benefits needs a household approach.
But if you look purely at income tax and rates payable, this is an individual matter, since income tax is charged on the individual.

Either way, I don't think that in the great scheme of things it is the most important issue. What really matters is getting a more progressive tax system overall, which would mean a radically different income tax system,and higher wealth taxes, in my opinion.

FF, have you sorted out you liability at higher rates yet? Its certainly purely academic for me :)

[P. G. Tipps]

Full Fact analyses it in a different way

https://fullfact.org/blog/who_benefits_most_Lib_Dems_income_tax_threshold-3310

"From what we have seen, Full Fact has little reason to doubt the calculations used by either side, and both seem to accurately present different sides of the argument. Which side is more useful is for the reader to decide."

Interesting ... though I had always assumed (obviously wrongly) that we had always been talking about individuals and not households. Personal tax allowances apply to individuals not households?

I know which method I think is more 'useful' ... ie, comparing "like" with "like"!

[french frank]

FF, have you sorted out you liability at higher rates yet? Its certainly purely academic for me :)

Team, the only thing that regularly vexes me is whether I'm recklessly gift-aiding more tax (basic level) than I've paid - and no, I'm not a tax evader! :-)

I must have been tired last night because there are two points about your figures where I would question the conclusion.

1. That if Mr Rich saves more than Mr Needy as a result of a tax policy it is a 'regressive' policy. That is no more true than if he pays more it's 'progressive'. Earnings £10,000, tax £5,000: that's a 50% tax rate for Mr Needy. Earnings £100,000, tax £40,000: that's only 40% for Mr Rich even though he's "jolly well paid his whack". That's regressive. And a truly progressive system would see him paying £60,000. [All figures entirely notional for the purposes of argument!]

2. The logic of your own figures in #166 is that personal tax allowances are inherently 'regressive'. Surely, you have compared Mr R's and Mr N's savings with their £10,000 allowances with what they would pay if there were no allowance at all and come up with a big saving for Mr R. So the logic is that the fairest solution would be to abolish the personal allowance. It would clearly be a nonsense if the starting rate were then 20%: Mr N would pay £2,000 tax on his £10,000, rather than nothing at all. A progressively uprated personal allowance clearly does benefit the lowest paid.

What you can say is that - as always - some people will fall through the net; and, as I've said, increases in the level of personal allowance will always benefit the low paid, but the level to which the allowance is uprated needs to be carefully balanced.

Overall, what I'm saying is that if you introduce a fair tax the rich should pay proportionately more of their income; the logic of that is if you simply abolish or reduce it, they must save more.

As for households v. individuals: I disagree with the basic premise of the IFS that 'if the wife earns £12,000 and the husband £50,000, they aren't 'poor'. So, combine the husband's and wife's incomes and treat as one? Mr Tipps might agree with that but I don't :-)

[teamsaint]

FF..
Re your point 1.

what we are talking about is whether the policy of increasing tax allowances is of iteslf regressive, rather than as part of income tax in the round. So those saying that increasing allowances substantially is regressive are correct, because the biggest gains of that specific measure go to the biggest earners. The exception is over £120k, wbut of course they got a seperate break with the 50% rate being reduced.
I would think that if you are a higher earner and save more it must be regressive , (ie as a percentage) but I wouldn't be absolutely sure....and in any case these calculations can be very messy round the margins of rate bands, where marginal rates can vary. So I take your point ,but I'm not sure it is correct in all circumstances.

2. I think you may be right actually about allowances being inherently regressive. this CAN be dealt with to an extent, with things like the taper for the very high earners. In my opinion, much more finely graded income tax rates, (along with simplified allowances and reliefs) might be a very good idea.
The concept of a citizens income, along with zero tax allowance and higher income tax rates is not a new one, and might have economic and social logic. I don't know which party last discussed it, although I think the orange party did back in the day.

I agree with your statement about balancing the increase in Income tax allowances with other measures. As it stands I was in favour of the policy increased allowance, because it really does help lower earners, in real if not relative terms. Whether a particular tax or tax change is progressive or regressive is not the only consideraion . As we have seen though,regression is deeply embedded in the tax system, and income tax is not the worst offender .

as for household incomes, when you take benefits etc into account, you really do need a computer.

Back to the specific, I hope I have convinced you that increased tax allowances means that an individual benefits at their highest rate, (unless they earn over £100k).
It is important IMO that people understand this.

These discussions are SO much easier in the pub, and with a biro and beer mat !!!

[french frank]

These discussions are SO much easier in the pub, and with a biro and beer mat !!!

One point I still disagree with is your definition of 'regressive': "the biggest gains of that specific measure go to the biggest earners" is not a definition of a regressive tax which is if it takes tax disproportionately from those who are less well-off (e.g. indirect flat taxes). It can't be said of an allowance that removes people from tax liability altogether (even if it does benefit the better-off too).

As we have seen though,regression is deeply embedded in the tax system, and income tax is not the worst offender .

There, my friend, we agree. 100%. And that is where the real problem lies - in my opinion. The rest is tinkering.

[teamsaint]

One point I still disagree with is your definition of 'regressive': "the biggest gains of that specific measure go to the biggest earners" is not a definition of a regressive tax which is if it takes tax disproportionately from those who are less well-off (e.g. indirect flat taxes). It can't be said of an allowance that removes people from tax liability altogether (even if it does benefit the better-off too).

There, my friend, we agree. 100%. And that is where the real problem lies - in my opinion. The rest is tinkering.

In terms of the proportion of income that you gain by an increase in allowances , the calculation varies as to where you are in the tax band.

SO: if allowances go up £1k, and you are just £1k above the threshold for basic rate, or £1k above the higher rate threshold, you get a greater percentage rise in your income, because the cash saving is the same for everybody above you in that band, but those much higher up the tax band benefit proportionately less, as a percentage of income.
So the proportion of income calculation isn't easy , and in fact is different in every case, although the cash amount is equal, (unless the change moves some of your liability into another band, IE for those on the margins of basic/higher rate ). Those just edging into higher tax bands do best proportionately.


no doubt " Regressive " taxes can be defined in different ways,but increasing allowances does, uncder the current rules give more money back to those who are better off. Generally.
That aside.....

I agree about tinkering, though, and the job is essentially done on the personal tax allowance.

[P. G. Tipps]

Back to the specific, I hope I have convinced you that increased tax allowances means that an individual benefits at their highest rate, (unless they earn over £100k).
It is important IMO that people understand this.

These discussions are SO much easier in the pub, and with a biro and beer mat !!!

Hmmm ... I don't know about French Frank but you haven't yet convinced me!

No one has said (as far as I'm aware) that those richer folk up to £120,000 don't benefit ... the debate has always been about whether they benefit more in real cash terms. I fail to see that they do and I think it's best we maybe agree to disagree on that point!

What is indisputable (hopefully!) is that those on lower incomes over the threshold gain proportionally more on their salaries than higher earners so that has to be considered 'progressive'?

Also, we are again rabbiting on about other factors and the unfairness of the tax system in general. That may well be true but we are supposed to be discussing an increase in the personal tax allowance alone. Of course the overall tax effect is what ultimately matters to people, but how to find a better and fairer system has wracked and baffled the best brains in the Civil Service for years!