Archive for July, 2010

Income Tax Reform: A Revision

Income Tax Reform

In a bid to restore the public finances to normality taxes must be raised and spending reduced. Reduction of spending alone will not reduce the structural deficit, currently standing at £150bn, fast enough for international fiscal stability nor will it maintain public investment in the economy whilst the recovery is still relatively fragile. That is why taxes must be raised and also reformed in order to maximise the potential offered through the tax system. This report will look at a potential model for income tax which will increase income tax revenues by £17.5bn per annum from the current £134bn.

This report has utilised data from the Office of National Statistics'(ONS) Labour Force Survey (LFS) and Annual Survey of Hours and Earnings(ASHE) and Her Majesty’s Revenue and Customs (HMRC). This report will establish the methodology used and the model for the reform of income tax.


Using data from the LFS for the usual hours worked per week for those in employment, given by LFS in a percentage, and converting the total in employment aged 16+ from a survey sample of 28,865,000. Therefore the actuals for those working less than 6 hours per week is 432,975 people. Between 6 and 15 hours inclusive 2,020,550 people. Between 16 and 30 hours inclusive 5,599,810 people. Between 31 and 45 hours inclusive 15,269,585 people and for those working over 45 hours per week 5,542,080 people. However the survey sample of 28,865,000 neglects the 1,735,000 remaining tax payers that are included in the tax receipts for HMRC from 30,600,000 people. Therefore the model will exclude the 1,735,000 people of which there is no data for.

The data from ASHE gives a 10 group percentile breakdown of those in employment, both part-time and full-time workers, along with hours worked and average pay for the corresponding percentile groups. For the purpose of the model each percentile group has been allocated a 10 per cent division from a total of 100. Using the percentile groups for hours worked and the actuals from the conversion of LFS data a new set of data has been created with hours worked, pay earned and numbers in employment. See Table 1 and 2.

Table 1 – Part-Time workers

Percentile Group Average Hours Worked Average Pay £ per annum Workers
1 6.4 2902 432975
2 10 4680 673516
3 12 5323 673517
4 14 5967 673517
5 16.1 7280 933301
6 21 10163 933301
7 23.2 12157 933302
8 24.4 13566 933302
9 25.4 15329 933302
10 28.8 21343 933302

Table 2 – Full-Time workers

Percentile Group Average Hours Worked Average Pay £ per annum workers
1 34.9 13872 1696621
2 35 16874 1696621
3 36.1 18249 1696621
4 37 19667 1696621
5 37.3 22575 1696621
6 38.8 29493 1696620
7 40 33750 1696620
8 40 36406 1696620
9 41 39680 1696620
10 45 51464 5542080


Using the new data set we can begin to apply the tax model. See Table 3. The increase of the Personal Allowance threshold to £10,000 excludes 3.3 million people from paying tax or just over 10% of 2010-11 tax payers. The Personal Allowance is also extended to the remainder, barring those earning over £150,000 per annum, so that, for the majority, disposable income is increased. The current graduated tax bands have been discarded in favour of a lump sum approach. This will ensure simplicity because one is taxed according to the bracket they fall into. The 10 per cent tax rate has been reintroduced in order to protect those less well off. A 30 per cent tax rate has also been introduced to encourage fairness within the middle income brackets whilst not creating confusion through an over complication of the system. The 20 and 40 per cent tax rates will remain for those in the low middling and high income brackets. It is fair to say that the most well off will bear the brunt of the reform. However, due to the increase in the personal allowance and a complete overhaul of the income tax system the effects of the increases can be regarded as negligible.

Table 3 – Income Tax Model

Income Bracket (£ 000s) Tax Bracket (%)
0 – 10 0
10 – 20 10
20 – 30 20
30 – 40 30
Over 40 40

As is similar with the current system, the first £10,000 earned will be tax free. However anything earned over the limit will be subject to taxation. If, for example, a person earning £39,000 pays tax only £29,000 of that is taxable resulting in a tax payment of £8,700 on the 30 per cent bracket that they would find themselves in. It would also leave them with £30,300 in disposable income. However this model does not take into consideration the effects of National Insurance Contributions on disposable income.

The revenue gained from the individual percentile brackets (see Table 4) would result in a gross revenue of £151,598,518,000. An increase of £17,505,518,000 from the current £134,093,000,000.

Table 4 – Tax Revenue from the Percentile Groupings

F/T Percentile Grouping Income from Tax (£ 000s) P/T Percentile Grouping Income from Tax (£ 000s)
1 656931 1 0
2 1166256 2 0
3 1399541 3 0
4 1640122 4 0
5 4266999 5 0
6 6614442 6 15212
7 12088417 7 201313
8 13440284 8 332815
9 15106704 9 497356
10 91918722 10 2253404
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Bank Reform: What Might be Done…

July 10, 2010 1 comment

Yesterday (9/7/10) the government appointed Commission on Banking convened for the first time. It is expected that the Commission will take a hard line stance on the current structure of the banks with the majority of the Commission expected to favour a break-up. While a break-up would favour public opinion and give the government the image of being tough on banks. In reality a break-up of the Universal bank into retail and investment would see the newly created investment banks move out of the economy and the newly created retail banks flounder with lack of investment.

The appointments to the Commission are driven by Mervyn King, the Governor of the Bank of England. It would appear that Mr King is seeking his Steengall-Glass moment but this is not the time for a Steengall-Glass moment. What is needed is a careful restructuring of the banks which protects the interests of both the City and consumers. A break-up would damage both.

Many have and will continue to argue that the recent financial crisis was driven by the ‘rampant greed’ of investment banking. It was, however, driven by retail banking as consumers increasingly relied on cheap and easy credit, such as mortgages and credit cards, to sustain their lifestyles. Mortgages and credit cards were the biggest drivers and cannot be supplied by investment banks. Investment banks did, however, supply the fuel and the two, main, arms of the financial sector created the perfect vehicle for growth until it crashed.

By breaking up the banks it places blame on investment banking when blame, in this situation, cannot be apportioned. One thing that can be done, whilst maintaining the Universal bank, is to legislate a securitisation of retail assets against the risk of investment by making sure that banks have X% of total assets in capital by year X or they will be broken up. This will ensure that if a situation like the recent financial crisis does occur again then the banks have enough capital to bail themselves out, which in turn means they will no longer be Too Big To Fail as they will be self-sufficient. This move will also create long-term stability in the sector. Alongside the proposed legislation is to tighten the lend to deposit ratio from the current 10:1 to about 5:1. This will ensure that retail banking is secure, stable and will inhibit, if not stop all together, the volatility of retail banking. It will mean that credit will be harder to obtain but it will also mean that the economy is less dependent on debt.

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