Are high earners really going to be destroyed by Labour’s Marxism?
Update: Since Labour have now revealed their tax figures and we’re not going off estimates, I have updated this piece appropriately. I had assumed that the top tax bracket would stay at 150K but it will in fact be reduced to 123K. All numbers and tables have been updated. If I’ve missed something, please let me know.
One question I keep asking as this car crash of a general election rolls on is, why do so many people have such a serious misunderstanding of economics?
Take, for instance, the absolute apoplexy from people earning the “chicken feed” figures of £70K or £80K to Labour’s proposal’s of new tax brackets for high earners.
Everyone seems to be under the impression that as soon as you move from one tax bracket to the next, John McDonnell will come round and personally snatch the food from your children’s mouths. But this isn’t how tax brackets work. Upon the introduction of a new tax bracket at £80K, someone earning £80K will pay no new taxes at all. It’s only earnings above that amount that they’ll be taxed more on.
Someone on £85K, for example, currently pays 40% on their earnings over this amount, the same as they do on all their earnings over £45K. The bump from 40% to 45% on earnings over 80K would result in a tax bill rise of £250. Obviously nobody likes a jump in taxes, but the idea that this represents some kind of Stalinist attack on the rich is ludicrous.
What of a top 1%er? A wage of £162K is enough to put you into the top 1% of earners in the UK. Labour’s tax plans involve lowering the threshold at which the top rate kicks in from £123,000 and raising the rate from 45% top 50%. Under this allegedly punitive Marxism, someone earning more than 99% of the country would find themselves paying an additional £5,450. The notion this represents an attack liable to leave our “professional classes” on the brink of penury is innumerate nonsense.
Meanwhile, someone on £50K? Nothing. Someone on £70K? Nothing.
We at least know what Labour’s tax plans will be. The Tories are much more circumspect, except to “not rule out” tax rises. The chances are that they won’t touch headline income tax figures and instead go for a National Insurance hike, because it’s regressive and thus saves money for their true constituents, the absurdly super rich.
If the Tories put, say, a modest sounding 1% onto the top rate of National Insurance, moving it from 2% to 3%, our hypothetical £85,000 earner would end up £400 out of pocket — again, not a terrible amount, but notably £150 more than Labour’s plans. So if McDonnell’s tax rise is 70’s style Marxism, one can only conclude an NI bump under the Tories would be akin to anarcho-Bolshevism inevitably leading to the burning of all banks and the hanging of the Queen in front of Buckingham Palace.
Likewise, our £70K earner, who would see no tax rise under Labour, would find themselves paying an extra £250 in NI if the Tories raised NI. Indeed, everyone earning between £45K and £88750 would see their taxes go up more from even a modest Tory NI boost than from Labour’s tax increases.
May has said things that would ameliorate such a rise. She has suggested raising the lower tax threshold, for instance. So, say they raised the income tax threshold from £11,500 to £12,000 and the NI lower threshold from 8060 to 9000. Even with a NI rise, this would be a net gain to people earning below £66K, but then it would start to bite, with Labour’s new bracket costing you less until your income hit £83,750.
If we say that Labour raise the lower thresholds, which isn’t in the manifesto but isn’t out of the question, the breakpoint at which Labour tax rises would cost you more than Tory tax rises is about £89K. In such a scenario, a £75K earner would get a £200 tax cut from John McDonnell and a £100 tax rise from Theresa May.
These are all hypotheticals, of course, as we don’t know what May’s government will do and are called on to merely trust her implicitly for some reason. However, the conniption fit thrown about the idea of Labour’s tax plans seems absurd when put into context. The chances are that the £80K-ish earners who are taking up newspaper inches complaining about Labour’s unfair attack on their incomes would end up being precisely the ones who would lose out by more under a Tory government than a Labour one. That, of course, is just talking about income, not the undermining of society and public services which will end up costing us all more in the end.
As with most things it seems to be a spasm of the knee as opposed to any kind of critical examination of what both parties are actually likely to do while in government.