The 50p tax rate

[sten_super]

Hilarious letter in the Telegraph today;
http://www.telegraph.co.uk/comment/letters/9114040/Cut-the-50p-tax-rate-to-help-boost-business-and-encourage-entrepreneurs.html
George Osborne 'must abandon folly of 50p tax' - Telegraph

If these guys are supposed to be our captains of industry, with that kind of logic, I'm scared for our future.

 

[beorhthelm]

I know someone who is in a position to expand their business but isn't because of the rate of tax. he reasons if over half of anything he makes from investment in his business goes in tax, he says he's working for the government, not himself and he'd be better off investing money elsewhere or go for early retirement.

 

[brightn'ove]

I know someone who is in a position to expand their business but isn't because of the rate of tax. he reasons if over half of anything he makes from investment in his business goes in tax, he says he's working for the government, not himself and he'd be better off investing money elsewhere or go for early retirement.

Taxes are the price we pay for a civilised society. Those who can afford to pay more tax should pay more tax. If he is giving up higher earnings purely out of spite for the tax rate that is obscene, it only affects earnings above 150,000, not a penny under that is affected by the 50p rate. What would you rather earn 150,000 or 180,000 (effectively 165,000) ?

 

[Tim Over Whelmed]

I know someone who is in a position to expand their business but isn't because of the rate of tax. he reasons if over half of anything he makes from investment in his business goes in tax, he says he's working for the government, not himself and he'd be better off investing money elsewhere or go for early retirement.

He's wrong, he's looking at personal tax and not CGT. He can get many schemes such as EIS etc which will benefit his investments and Entrepreneurs Relief as well. I have invested in several businesses lately and we have created, collectively, 18 jobs that wouldn't have been there, so it's a balance of encouraging TRUE entrepreneurialism without just giving the rich tax breaks.

 

[Driver8]

Taxes are the price we pay for a civilised society. Those who can afford to pay more tax should pay more tax. If he is giving up higher earnings purely out of spite for the tax rate that is obscene, it only affects earnings above 150,000, not a penny under that is affected by the 50p rate. What would you rather earn 150,000 or 180,000 (effectively 165,000) ?

Earnings from £100k to about £114k are actually taxed at 60% due the removal of personal allowances.

 

[Pavilionaire]

But it's not just 50% tax, it's also National Insurance on top, which means that the government WILL get more than half of anything over £150K earned.

In many business deals the "doubling" factor is important. I like to watch 'American Pickers' and their rule of thumb is if you buy something for 1X you look to sell for 2X or more, otherwise it's not worth it.

Similarly, in accountancy, you will look to employ someone on a salary of 1X and look to bill out their time at upwards of 2X, or even 3X.

I had a conversation witha client yesterday who does business in Monaco, saw his draft tax bill including 50% tax, and then discussed the practicalities of moving his business lock, stock and barrel to that jurisdiction.

I firmly believe that tax plus NI should always be less than half, and that the taxpayer should always take home more than 50% of every pound earned.

 

[bhachris]

The problem with a 50p rate is that we are in a global economy. The wealth creaters and employeers would rather do their weath creating and employeeing in a country with a lower tax rate if they have the choice. Therefore the 50p tax rate costs the government revenue rather than generating it. Its a self defeating tax that Labour brought in and the Tories will not be able to get rid for risk of being seen as helping the rich while punishing the poor.

 

[sten_super]

I know someone who is in a position to expand their business but isn't because of the rate of tax. he reasons if over half of anything he makes from investment in his business goes in tax, he says he's working for the government, not himself and he'd be better off investing money elsewhere or go for early retirement.

This is what the people in the letter are trying to say, I think.

He's wrong, he's looking at personal tax and not CGT. He can get many schemes such as EIS etc which will benefit his investments and Entrepreneurs Relief as well.

But this is exactly why I don't understand it. The 50p rate is income tax, not capital gains. Taking money out of a business as wages to reinvest in expanding the business is horrendously inefficient from a tax perspective.

If anything, the increased level of income tax should be encouraging people to leave money in their businesses (rather than take it out as wages to be taxed) and use it for investment purposes, to take out again as wages once the (allegedly temporary) 50p tax rate has been removed.

 

[Pavilionaire]

Never mind about perceptions, surely the last 4 years has taught us we have to deal with reality?

Our tax system is overly complex and the National Insurance element has become fat and grotesque purely because politicians have not had the balls to up income tax, so have upped NI instead. They need to stop treating the public like fools. Getting rid of some NI will cut red tape and simplify the system, but it will inevitably be at the expense of a rise in taxes.

 

[Deano's Invisible Pants]

Nobody seriously thinks this tax rate is about generating revenue for the government. It is a purely political tax, introduced for reasons of social harmony and giving a (false) impression of fairness. There is a broad consensus that the disincentive created by the tax outweighs the additional revenue raised from those still earning over 150k.

 

[mccraque]

With the potential earners of such tax likely to be some of the more mobile and as the poster above mentioned - given that this is a global economy....would it not be a better idea to cut the rate of tax and incentivise others to come to the country ?

 

[Tim Over Whelmed]

This is what the people in the letter are trying to say, I think.



But this is exactly why I don't understand it. The 50p rate is income tax, not capital gains. Taking money out of a business as wages to reinvest in expanding the business is horrendously inefficient from a tax perspective.

If anything, the increased level of income tax should be encouraging people to leave money in their businesses (rather than take it out as wages to be taxed) and use it for investment purposes, to take out again as wages once the (allegedly temporary) 50p tax rate has been removed.

We are saying the same thing, TBH I've never understood people's reluctance to pay more tax, in a way. If you earn more, you pay more, but you still take home more money. Taxation is, broadly, fair. The problem comes when you don't do anything with the "spare" money you have. You wouldn't reienvest in that business but you MAY use it to invest in another business that qualifies you through EIS?

 

[Was not Was]

Pav - all fair points no doubt about the tax/NI system and how it works.

But these letter writers are trying to influence govt policy by basically saying: if you incentivise us to take more money out of our businesses (as our personal income), we'll create more jobs.

It's special interest pleading, dressed up as trying to help the economy.

 

[Hotchilidog]

Yep a tax break for those earning over 150k a year is just what this country needs. Times are tough, deal with it, everybody else has to.

 

[Since1982]

Nobody seriously thinks this tax rate is about generating revenue for the government. It is a purely political tax, introduced for reasons of social harmony and giving a (false) impression of fairness. There is a broad consensus that the disincentive created by the tax outweighs the additional revenue raised from those still earning over 150k.

Correct - It's a tax born out of spite rather than any sound economic principle

 

[brightn'ove]

It's special interest pleading, dressed up as trying to help the economy.

this.

The fact that they are pleading to change the income tax rate rather than corporate tax rates just shows that all they are looking for is a few extra £££ in their own pockets.

 

[sten_super]

I firmly believe that tax plus NI should always be less than half, and that the taxpayer should always take home more than 50% of every pound earned.

I agree with this as a basic principle.

Our tax system is overly complex and the National Insurance element has become fat and grotesque purely because politicians have not had the balls to up income tax, so have upped NI instead. They need to stop treating the public like fools. Getting rid of some NI will cut red tape and simplify the system, but it will inevitably be at the expense of a rise in taxes.

And I agree wholeheartedly with this. The more streamlined the better, IMHO.

Nobody seriously thinks this tax rate is about generating revenue for the government. It is a purely political tax, introduced for reasons of social harmony and giving a (false) impression of fairness. There is a broad consensus that the disincentive created by the tax outweighs the additional revenue raised from those still earning over 150k.

I'd love to know where this broad consensus is. I've read two news articles this morning saying they 'believe' that they know the findings already of the HMRC investigation into the 50p tax rate, and both came to opposite conclusions (one that it would raise a lot less than estimated, and one that it would raise more). I suspect they are both simply reflecting the authors desire rather than any inside info, but even so neither suggested that there will be a negative revenue effect from the tax.

 

[fleet]

It clearly will not be cut as to give a bonus to the most wealthy when everyone else is suffering would not happen, but it is the only tax cut that would put money back into the economy as the excess income from the rich would most probably be spent. Cutting any other tax (including VAT which Labour suggested) may possibly make peoples lives better (although I doubt it would have any real impact on sale prices for most things) but will not put money into the economy.

 

[Gazwag]

This is what the people in the letter are trying to say, I think.



But this is exactly why I don't understand it. The 50p rate is income tax, not capital gains. Taking money out of a business as wages to reinvest in expanding the business is horrendously inefficient from a tax perspective.

If anything, the increased level of income tax should be encouraging people to leave money in their businesses (rather than take it out as wages to be taxed) and use it for investment purposes, to take out again as wages once the (allegedly temporary) 50p tax rate has been removed.

Is there confusion between company tax and personal tax here.

A sole trader pays tax on all his profits, whatever he draws it out of the business or not. A company director pays tax on the salary he draws and dividends (at a lower rate).

If a sole trader wants to re-invest in his business he has to, in effect, use the cash left over after he has paid his tax - if this investment creates more profit then he will be taxed more, but its not as if he will get nothing out of it, he will still get 48% in his pocket.

If a company wants to invest the company will use its cash (after corporation tax) so the director will not withdraw it in wages to then invest

 

[Pavilionaire]

Pav - all fair points no doubt about the tax/NI system and how it works.

But these letter writers are trying to influence govt policy by basically saying: if you incentivise us to take more money out of our businesses (as our personal income), we'll create more jobs.

It's special interest pleading, dressed up as trying to help the economy.

But often when you're regularly earning £150K plus the choice is: carry on paying increasing UK taxes, move your business out of the UK altogether or sell up and retire.

VAT has gone up, employer's NI has gone up, employees NI has gone up, the Higher Rate tax band has come down, the tax free personal allowance is withdrawn for those earning over £100K and 50% kicks in over £150K.

Low growth in the UK is a fact, and I believe the EU factor is overplayed, while the UK tax / red tap burden in employers is underplayed. The government would do better to get the 50% rate down to 45-47% and focus on trying to phase out Class 2 NI and reducing Employer's Class 1 NI, aka "The Jobs Tax" that Cameron banged on about pre-election, then increased by 1% in the Emergency Budget.