Tuesday, 14 February 2012

Austerity Welfare? What About Austerity Taxes As Well!

The tax calculations for this article are subject to my infinite capacity for error, but you can check them for yourselves if you wish - I have used HMRC archive tables for income tax, surtax and personal allowances.
I have eyed in the approximate modern equivalencies (based on the National Archives currency converter) at 1:25, 1950-2012
and calculated the modern tax returns here.


For the past few months, I have been arguing that austerity will not reduce the deficit, but will just cause a recession. I have also been arguing that the answer is to increase tax – not on those who have nothing to spare, but on those richer people who are saving not spending.
In these days of ‘austerity’, it is almost de rigeur to cite Beveridge (both Liam Byrne and Ian Duncan Smith have appealed to ‘Beveridge principles’) … and I have quoted his aphorism: ‘bread for all before cake for any’.

Income Tax in 1950
So were Income Tax rates higher in those 'Beveridge' years after 1945?

Certainly, the rate of taxation was much higher in days of 'austerity' after the Second World War. The basic rate of income tax was 45% (compared to 20% today), but higher-earners were subjected in addition to a ‘surtax’ which rose from 10% on £2000 to 52.5% on incomes over £20,000.

‘We’re all in this together’, says Cameron, but the rich are not ‘in it’ to the degree that they were after the war.
I have calculated the tax that various earners would have paid in 1950.
Someone earning £25,000 in 1950 would have paid £20,600 of it in tax to the Inland Revenue – 83% of their income was taken in tax. By contrast, someone earning the equivalent income today (£625,000) would be paying only £290,000 (46%) in tax.

But before you go rushing ahead and demand a return to 1950’s values in income tax, you need to remember that Thatcher slashed the rate of income tax, and that 13 years of Labour government saw a relentless upwards pressure on the tax threshold.
In 1950, ALL wage-earners paid tax – 12.5% up to £50pa, and 25% up to £2,000pa – with the result that someone on £1,000 a year paid £320 a year in tax (32%) … whereas some on the equivalent income today (£25,000) would be paying only £3500 (14%).

So – whereas to take the highest earners back to the kind of ‘all-in-it-together’ taxes they were contributing in 1945 would mean a huge 77% increase in their taxes – to do the same for today’s mid-earners would mean a massive more-than-double increase in the actual amount of income tax they paid.

Of course there are differences – purchase tax has been replaced by VAT (at 20%), and I realise that high-earners nowadays seem to be able to avoid tax almost altogether – but the uncomfortable truth would still seem to be that (at least on paper) we have a system of taxation today which is easier proportionally on middle-earners than the system in 1950. The tax structure in 1950 appears more regressive than today, and this is more-or-less true, in fact, of any time before Thatcher.

Conclusion
Nevertheless, as I have argued before, taking money off anyone earning less than £25,000 today ends up stripping as much out of the tax yield as it puts into it, so there is no point in whopping up taxes at the lower end … however ‘fair-to-the-working-man’ it might be regarded as being.

Thus while I realise that a raise in Income Tax would be an absolute anathema to any Party which had hopes of getting elected, I would argue that needs must in a crisis. In a situation which is economically as dangerous as any war has in the past been militarily, I think it is increasingly unavoidable that those in society who DO have ‘something to spare’ should be asked
at least in the short termto contribute more.

They were contributing much more in 1950.

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