Tax and Benefit Withdrawal Rates

The Times today flags up some research from Grant Thornton on the marginal tax rates (more correctly, the tax and benefit withdrawal rates) faced by some people.

Nearly 1.7 million people on low incomes face deductions totalling more than 60p in the pound from their pay, putting them in a higher tax bracket than millionaires, according to Treasury figures highlighted by leading accountants.
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The way in which the tax credit system operates means that once claimants’ income exceeds £5,220 a year the Revenue claws back 37p in every pound of tax credit that they receive. For those who earn just enough, £7,185, to take them into the basic-rate tax bracket, the combined effect of the deductions they suffer can be devastating, Mr Warburton said.

Someone who is on the minimum wage of £5.35 an hour, working 30 hours a week for 50 weeks a year, would be earning just over £8,000 a year. At this level, individuals would be paying income tax of 22 per cent plus national insurance at 11 per cent. However, they would also be suffering a 37 per cent clawback of their tax credits, making a combined deduction, or “marginal tax rate”, of 70 per cent.

It's actually even worse than that. As Chris Dillow pointed out (in a post called, rightly, Absurd)

Here’s a question: Take a married couple with two children under 11 and pre-tax earnings of £200 a week. If they get a better job, raising their earnings to £300 a week, by how much does their net income rise?

£60? £50? £40?

Nope. £8.52.

Yes. £8.52. That’s a marginal deduction rate of 91.5 per cent.

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Marginal deduction rates for many people on lower earnings are horrifically high; 89.5 per cent for a single parent with one child earning less than £400 a week, for example.

Please note that this information is from back in August last year. As Chris asks, is this really the best tax system that anyone can come up with?

The simple and obvious way to deal with this is simply not to tax those on low incomes at all. Quite why anyone on less than median income is paying income tax I can't quite fathom. As so much of government spending is in fact about redistribution, why are we taking money from the poor to give money to the poor? A depressing answer is here in a piece for TCS, based on information I stole borrowed from Chris Dillow again.

The simple point is that if you want to have a big State, then you've got to tax the incomes of all those poor people. The rich simply don't have enough money to pay for it all. So you face something of a problem. If you want a redistributive state, then you need to have a small one, one small enough that you can pay for it only by taxing the rich.