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

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

http://pulse.yahoo.com/_AUKP33UE7QJCXD5VHSEQJGC63I Carole

Were there 100,000 signatures on that letter? No? Why does that get a Government debate, yet any other e-petition is ignored!
http://twitter.com/politicalplanet/status/175241683410239488 Political Planet

Memo to 50p tax trashers, #2: The effective tax rate is hardly ever 58p: Alex Hern further questions the letter … http://t.co/xoZCozLl
http://twitter.com/therightarticle/status/175255753291071489 Michael

Memo to 50p tax trashers: The effective tax rate is hardly ever 58p – http://t.co/kreFNEBD
http://twitter.com/tonybovaird/status/175256108145975296 Tony Bovaird

Memo to 50p tax trashers: The effective tax rate is hardly ever 58p – http://t.co/kreFNEBD
http://twitter.com/durhamcub/status/175256798218043392 Martin Steel

Memo to 50p tax trashers, #2: The effective tax rate is hardly ever 58p: http://t.co/QXEWYWOH by @alexhern
http://twitter.com/beccaet 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.
Mr. Sensible

The right just don’t get it do they…
http://twitter.com/chairmanal/status/175350824480948226 Climate Chimp

… 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
http://twitter.com/shamikdas/status/175350889530408961 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
http://twitter.com/fergusonkeith/status/175351331006062592 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
Chris Moody

And they completely ignore the massive burden on new graduates, who if they can find themselves a job, pay income tax, NI and their massive loan repayments, all of which add up to something like 35-40% of their usually meagre salaries.. Why are the Right not talking about disincentives for them?
http://twitter.com/alexsmithnp/status/175352500675809280 Alex Smith

… 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
http://twitter.com/db_lfc_2011/status/175356400376090624 D Brady

@Joey7Barton the effective tax rate is hardly ever 58p: http://t.co/iCgqJe7Z #BBCqt”
Tony27nine

Your confusing corporation tax and income tax. A corporation tax saving doesn’t affect the employee. I own a business. If I earned over £150k at the point that I paid the money out to myself i would indeed pay 57.8%. The fact that the company pays less tax is irrelevant.
I signed the letter and i don’t even qualify to pay tax at the 50% rate. i can however see that if we want to encourage people to the UK to create jobs we need to stop disincentivising them with the fourth highest top tax rate in the world.
I employ 450 people. In setting up the business 7 years ago I worked 80+ hours a week for years. I mortgaged my house and gave guarantees to the bank.I put in nearly all my savings. In the first 15 months I took out £26k in wages. Are you saying that it would be OK to penalise me now for reaping the benefits of that? Most of the people I know who have their own businesses have got similar stories. We aren’t all ‘fat cats’ out for everything we can get and I’m happy to pay my fair share. Ask any of the 450 people that work with me and not one begrudges what I earn.
I would describe myself a socialist entrepreneur. I think that their should be fairness in the tax system but that hard work and sacrifice should be rewarded.
You may be right when you say the”right just don’t get it” but when comments from the left come over as whingeing jealousy you’re not doing yourself any favours either.
http://twitter.com/jintyg51/status/175520139192709120 Janet Graham

… 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
BenM_Kent

“I employ 450 people. In setting up the business 7 years ago I worked 80+ hours a week for years. I mortgaged my house and gave guarantees to the bank.I put in nearly all my savings. In the first 15 months I took out £26k in wages.”

So what?
Selohesra

I don’t know where it is but there is obviously an optimal rate to maximise receipts from the rich – I assume we would want to maximise the tax take from the rich rather than impose higher rates just to fuel the politics of envy so beloved by Labour
Anonymous

So let me get this straight – if someone refuses to obey a rule because they don’t like it then change the rule to one they do like. Ummm….. sounds like a bit of a slippery slope to me. Or could we have one set of rules for some and another set for everyone else? yes… that might fix things.
Franco

Someone might work hard for a while, that doesnt make the amount they earn morally acceptable. Some people work hard their entires lives and endure hardship you couldnt imagine to little or no reward.
Tony27nine

So what?…. So that’s 450 people that have a decent standard of living and who are not a burden on the welfare state. It really doesn’t matter if you feel it’s ‘morally’ right that people are wealthier than others. What we need to save the country right now are more jobs. You can’t simply magic them up. Or , are you advocating that we simply keep squeezing the rich to pay for the increasing number of unemployed until all the really wealthy have left the country and we have 10 million on the dole? Isn’t this just a race to the bottom?
Tony27nine

Franco, I absolutely agree. I was born in Bradford, lived in a terrace house. My dad worked on the railways. He worked hard and what money he and my mum made from her hairdressing they spent on giving me the best education they could. They weren’t wealthy but they were ok. I absolutely agree that we should do more to help those less well off. That to me means having policy that encourages economic growth. We need to create jobs to get people off the dole and if this means incentivising people to come to Britain with lower tax rates then so be it. I’m all for increasing the tax free allowances to help low earners, I have no problem that those earning over £100k lose their tax free allowance. I have no problem losing child benefits, I have no problem paying for my own pension or healthcare because I can afford to and others can’t. Let’s start a proper dialogue that doesn’t begin with the mistaken belief that people with money don’t care about those that don’t.
Anonymous

@ Tony – I reckon most of us want a similar outcome here – more jobs, especially rewarding ones. Where I completely disagree with you is about how best to do that. I am convinced that the old formula of reducing business costs plus incentivising international investers and “entrepreneurs” to come here as the best place for them to get richer is no longer a realistic way to bring jobs and prosperity to the rest of the population.

Take a look at the world around us – the most prosperous countries with skilled workforces are the ones that don’t have extremes between rich and poor – Sweden, Japan, Netherlands, Finland and even Germany. And when I say most prosperous i’m talking about jobs and conditions for the vast majority, not the top 10 or 20%.

Britain by contrast has almost identical GDP per capita to Finland but for the average person this translates to much lower standards of living and poorer job opportunities. It’s about running the country and the economy for all rather than for a few. A rising tide doesn’t lift all the boats if the yacht club only allows its members out on the water.
http://twitter.com/robertcp/status/175914421804204032 Robert CP

… 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
Selohesra

I think a better description would be let the state help the poor by maximising the tax take from the rich rather than ignoring the needs of the poor by pursing sub-optimal policies purely to punish the wealthy
http://twitter.com/Newsbot9 Newsbot9

Right. And that means raising the capital gains tax to the same level as income. Certainly if that’s going to happen we can discuss dropping the top rate to 40%.

Also, we need an infusion of backbone from the IRS, and real punishments for significant tax fraud by the rich. Jail, every time, plus massive fines. No deals, ever.
http://twitter.com/Newsbot9 Newsbot9

You’re completely ignorant of entrepreneur’s relief. Which no true successful business owner would be.

In reality, social predators setting up companies which prey on the poor and destroy jobs are precisely what we DON’T need.