Marginal rate discontinuities in the UK income tax system [0] are driving highly undesirable (from the taxman's point of view) behaviour. The increase in marginal tax rate from £100K p.a. upwards has already led to:
- doctors going part-time to keep their income below £100K, in the middle of a shortage of doctors across the health system
- employees turning down promotions because with the combined effects of income tax, student loan repayments and loss of childcare subsidy the effective marginal rate of income tax between £100K and £117K is > 100% (!)
- single high earners (core voters of the present government) effectively subsidising families of middling earners (the opposition's core voters) because the discontinuities apply to single person's income, not combined household income
The behaviour changes are simple first order effects. The second order effects on public service workforce availability and overall tax take were also highly predictable.
If I understand the linked chart, there are discontinuities in the marginal tax rate, not the effective tax rate. So in that case yeah at certain levels the amount you owe on each additional dollar goes up, but that would not mean that making 105k is worse than 100k unless the marginal tax rate is greater than 100%.
This ignores stuff like losing childcare subsidies that is likely not included on the graph.
In the us you hear stories of people decreasing their income to be in a lower tax bracket and often it is due to them not understanding that the tax brackets are for marginal tax rates.
> If I understand the linked chart, there are discontinuities in the <i>marginal</i> tax rate, not the effective tax rate.
True, but they are harsh discontinuities, sufficiently so to have the effects I described. And yes, there is a common combination of personal circumstances (high income plus student loan repayments plus child care subsidies) which means that any gross salary between £100K and £117K means less net income than being on £99,999 gross. I've not been able find a graph for that, but the maths checks out.
The result of this particular combination is to effectively impose a ceiling on many employees at £100K gross, because they would have to receive a greater than 17% pay rise to be better off than before.
> there are discontinuities in the marginal tax rate, not the effective tax rate
This is often claimed. And the whole point of the article and much of this discussion is that no, there are often major steps / discontinuities in the overall tax rate. In the US, the many ACA discontinuities just by themselves are large and do not effectively pay attention to the bottom line. For that matter, I don't know of a single country or US state that actually "runs on effective tax rate". Which might be a solution to the problem if anyone were actually looking for a solution to the problem.
Decreasing marginal rate thresholds on UK income tax (like going from 60% at 125,139 to 40% at 125,140) is insane and leads to wacky optimisations like the following:
Suppose you predicably earn 150k a year. Taking 110k per year salary and putting 40k in your pension for four years results in less net income than:
* Taking 140k salary and 10k pension in year one
* Take 100k salary and 50k pension in years two, three, and four
In both cases you have taken 440k salary and put 160k in your pension. But in the first case you have paid highest tax rate of 60% tax rate on 40k and in the second case you paid the highest tax rate of 60% on only 12,570.
Since the annual pension allowance is now 60k per year, and you have a three year carry-forward to use unused pension allowance from previous years you can do this trick with quite a wide range of gross salaries. And you can use it for the 125,139 to 125,140 decreasing marginal rate, or the 59,999 to 60,000 decreasing marginal rate due loss of child benefit.
- doctors going part-time to keep their income below £100K, in the middle of a shortage of doctors across the health system
- employees turning down promotions because with the combined effects of income tax, student loan repayments and loss of childcare subsidy the effective marginal rate of income tax between £100K and £117K is > 100% (!)
- single high earners (core voters of the present government) effectively subsidising families of middling earners (the opposition's core voters) because the discontinuities apply to single person's income, not combined household income
The behaviour changes are simple first order effects. The second order effects on public service workforce availability and overall tax take were also highly predictable.
[0] https://www.telegraph.co.uk/multimedia/archive/03270/tax_327...