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Economic Myths: Means-testing means smaller government and lower tax rates.

Friday, February 10, 2017 8:04
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The lefties love means testing, because they love having lots of rules on who is deserving and who isn’t, and lots of public sector meddlers to administer it all. They don’t care about higher tax rates on higher earners, in fact they welcome them, and refuse to accept the concept of the Laffer Curve. Fair enough, at least they are coherent.

What winds me up no end is when supposed Conservatives pretty much agree with them, ostensibly because means-testing means smaller government and lower tax rates.

This is clearly arrant nonsense. Just as I was drafting this post in my mind, MBK conveniently sent me an article from the FT which gives some illustrations.

Bearing in mind that we can view the income tax-free personal allowance as a kind of universal benefit or a tax rebate, what happens if this is withdrawn from people whose earnings are above an arbitrary threshold..?

Among higher earners, arguably the most egregious quirk in the tax system is the tapering of the tax-free personal allowance on annual income above £100,000. For every £2 earned above this threshold, £1 of relief is taken away. Income earned in 2015-16 between £100,000 and £121,200 will therefore effectively face an additional tax rate of 20 per cent.

Combined with the higher income tax rate of 40 per cent levied on income above £42,385, “it isn’t anything more or less than an effective marginal income tax rate of 60 per cent,” says Paul Johnson, director of the IFS.

Patricia Mock, a tax director at Deloitte, says the 60 per cent rate — which has never been officially recognised as such — affects ever more taxpayers as wage inflation takes a higher proportion of salaries above £100,000. Official figures show the number affected rose from 588,000 in 2010-11 to a projected 791,000 in 2014-15.

Yup, the end result is that more people are paying more tax and suffering higher marginal tax rates. Why do Conservatives go along with this?

I accept that some people will say “Come off it, people earning £100,000-plus are doing all right for themselves, they can afford it” (and clearly they can), but the general principle applies all the way down the income scale. As we well know, the marginal rate on the first £20,000 is effectively 80% – 90% if you take into account foregone benefits.


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