Memo to 50p tax trashers, #2: The effective tax rate is hardly ever 58p

Green Politics

Alex Hern further questions the letter to the Telegraph supporting the scrapping of the 50p tax rate.

 

While we’re picking apart the letter from 500 “wealth creators” to the Telegraph, Paul Lewis, presenter of Radio 4’s Money Box, points out that another of their claims also plays loose with the truth.

The letter begins:

Given the state of the British economy, we urge George Osborne, the Chancellor, to consider scrapping the top rate of tax in his forthcoming Budget. The tax, which is in effect a 58p tax after national insurance is taken into account, puts wealth creators like us in a very awkward position.

As Lewis points out, the 50p tax is very unlikely indeed to actually be ‘a 58p tax after national insurance’.

He explains how they came to that figure:

If an employee earns more than £150,000 then to get another £480 into their pocket you do indeed need to pay him or her £1000. That is subject to 50 per cent tax and two per cent NI leaving £480. But the employer also has to pay the employer’s National Insurance which is 13.8% or £138.

So out of a total cost to the employer of £1138 the employee gets just £480. Subtract one from the other and tax of £1138 – £480 = £658 has been paid. So the ‘rate’ of tax is £658 / £1138 = 57.8 per cent.

Except that total is unlikely to ever actually be paid:

These are large companies paying full-rate corporation tax on their profits. The whole cost of paying employees – their gross pay and the employer’s National Insurance charge – is deductible from profits.

So in fact the gross cost of paying someone £1000 is reduced by the corporation tax saved. Corporation tax is currently 26 per cent and falls to 25 per cent from 2012/13. The total extra pay bill of £1138 reduces corporation tax by £1138 x 25 per cent = £284.50. So the net cost to the employer is £1138 – £284.50 = £853.50.

The employee gets £480 in their pocket. And the amount that has disappeared in tax is £853.50 – £480 = £373.50. So the tax ‘rate’ is £373.50 / £853.50 = 43.8 per cent, which rounds up to 44 per cent of the total costs.

Lewis adds:

The only occasion when the net tax take from the grossed up pay would be almost 58 per cent is if the person earning over £150,000 is an employee who is not contracted out of state second pension, and the company makes no profit.

Hardly a titan of industry.

See also:

• Memo to 50p tax trashers: Laffer Curve peaks at over 75 per cent – Alex Hern, March 1st 2012

• It’s official: the 50p tax rate raises revenue – Alex Hern, January 9th 2012

• 50p tax: Still a Tory obsession, still not that exceptional – Alex Hern, November 24th 2011

• The 50p tax debate: Are we taxing off our nose to spite our face? – Luke Bozier, September 16th 2011

• Only quarter of voters want to scrap 50p tax – Will Straw, August 1st 2011

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26 Responses to “Memo to 50p tax trashers, #2: The effective tax rate is hardly ever 58p”

  1. Rebecca Taylor

    I used to work in Belgium, where a salary that wouldn’t be subject to higher rate tax in the UK (never mind the 50p rate), was subject to around 48% deductions (tax and social security combined).

    So when people earning over £150k bleat about being taxed at 50% on their income over that level, when I paid almost that for many years earning less than a third of what they did, I don’t really have any sympathy.

  2. Mr. Sensible

    The right just don’t get it do they…

  3. Climate Chimp

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  4. Shamik Das

    … Aaaaaaand here's @AlexHern's second memo to the 50p tax trashers: the effective tax rate is hardly ever 58p: http://t.co/vtGsCkIq #BBCqt

  5. keith ferguson

    … Aaaaaaand here's @AlexHern's second memo to the 50p tax trashers: the effective tax rate is hardly ever 58p: http://t.co/vtGsCkIq #BBCqt

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