What is your marginal rate of tax?

The marginal rate is the rate you pay on the next pound you earn. Mine is 20%. I bet yours is higher!

If you are employed and earning below the higher tax threshold, then you are paying around 32%. The difference is employees NI contributions. As a pensioner I do not pay NI.

So, if you are economically productive, you get clobbered by an effective rate of 32%, while I, an economic liability pay 20%. So much for a government that wants to make work pay.

I did hear that the George Osborne wanted to merge income tax and NI but was concerned that it was political suicide. I got a bit worried about its impact on my own finances, so I started to think about it.

National Insurance used to be a low fixed rate. It was easy for politicians of whatever persuasion to increase without the making the headlines that an income tax increase would make. So NI became a percentage, then two rates, then a bigger percentage with a cap, then a bigger cap. Higher rate tax payers pay NI at a reduced rate of 2% making their effective rate of direct tax 42%.  Its the tax that grows. Why? Well it’s hard to avoid so it is a reliable tax with a low political downside. It is not the growing welfare state that has increased the NI rate, that is a smokescreen.

One of the other issues with NI is that it relates to unemployment benefits, and is tied to other schemes in Europe and the commonwealth that allows benefits to be paid across Europe and wider. Whether you believe they exist of not it is used to restrict welfare migrants. Didn’t contribute – can’t claim. This may be a good reason to keep it.

There is a solution. Put income tax up to 25% and 45% and reduce NI from around 12% to 4 or 5%. The exact figures should be budget neutral, but for lower rate taxpayers, those who have suffered the biggest drop in living standards, it would reduce effective tax by 2% or more. That would reduce poverty, and have a Keynsian boost to the economy at no cost to the exchequer.

I am the first to admit that the figures need checking. My back of the hand estimates seem reasonable but I do not have the resources to trawl through government statistics to prove this. Trying to decipher government tax statistics is only for those who do not value their sanity. (Too late!) I would like to see our politicians grasp this nettle. Income tax has a broader tax base than NI, so the rate can be lowered.

I do feel like a chicken voting for Christmas. I won’t be popular with pensioners, but why do we get away with a lower effective rate of tax than young people struggling to raise families. Ultimately if you do not earn, you do not pay.

I do worry that we get rid of NI and I would end up paying 32% tax with the rest of you. Sometimes you just have to trust politicians to do the right thing.

We are told that the age growth in the population is one of the main reasons for the crisis in the NHS budget. Well wealthy pensioners should help pay for it.

I’ve just remembered that pensioners are a well organised and effective lobby group. Well workers paying 32%, get organised and fight for a more honest tax system.

Addendum: Just been reading the 2020Tax Commissions's Final Report. (http://2020tax.org/2020tc.pdf).
It makes my rant look mild, very mild. They add employers NI into the marginal rate and get a lower income marginal tax rate of over 40%. They argue for a single distributed income tax of 30% to replace income tax, employees NI and employers NI. Its a bit right wing for me based on a huge cut in the top rate of income tax, but then they are sponsored by the Institute of Directors. Does the sponsor invalidate the arguement? I'm still reading it (146 pages) but some quotes show their bias to big business. "Tobacco duties have been justified on the externalities that are mostly either dubious or actually private costs." DUBIOUS? or PRIVATE COSTS! These people are dangerous.