Realist, not conformist analysis of the latest financial, business and political news

Why Not Copy India’s Tax System – Only The Rich Pay Income Tax?

There was a time when only those with truly interesting incomes paid that levy, the income tax. The argument was then, as it is now, that those who benefit more from the existence of this lovely society we’ve built pay more for the maintenance of this lovely society. The idea has much to recommend it of course. At which point we might want to consider adopting a part of India’s income tax system. Let’s go back to that idea that only those with truly interesting incomes do get taxed on said incomes.

For what has happened since those halcyon days that we ourselves did that is that the income tax system has crept down to where people we officially define as poor are having to pay income tax. Which wasn’t that original point nor justification at all now, was it? The way successive Chancellors have done this has been quite simple. Wages rise over the decades faster than prices. So, if things like income tax allowances only rise with inflation, not the general wage level, then people ever further down the income spectrum will end up being caught in that tax net. It’s called fiscal drag and damn near every Chancellor has used it over the past century.

Thus this idea from India has merits:

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]With middle-class apathy on the rise, Finance Minister Arun Jaitley may double the income tax exemption threshold for the salaried from the present Rs 2.5 lakh to Rs 5 lakh while also reinstating tax-free status for medical expenses and transport allowance, providing some relief to the section already under strain since demonetisation.[/perfectpullquote]

5 lakh is, 500,000 Rs, close enough, £5,000 a year. But that’s obviously not right when considering incomes across countries, we need to tether this to some measure of how rich each place is. India’s income per head is in the region of 100,000 Rs, perhaps £1,000 a year. The UK’s is closer to £25,000*. So, India is proposing that only households on 5 times average income per capita have to even file for income tax, let alone pay any. So, yes, let’s adopt that same idea for the UK. Only those on 5 times average income, say those over £125,000 a year, have to pay income tax. Perhaps to make it easier we could just abolish all tax rates below the 45% one, that’s about the right sort of number anyway.

For that would be where we arguably should be. Only the truly well off have to pay income tax. Sure it would mean we’ll have substantially less government than we do now but then that’s a bonus right, not a problem?

*It’s difficult, income per head, GDP per capita, average income, they’re all different. But we’re still about right in the order of magnitude here.

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