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VeryMeanReversion

Emtr Thoughts

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This was triggered by the three-day week thread but is hopefully an original subject to get your brain cells going.

EMTR is "Effective Marginal Tax Rate". From wiki :

"The effective marginal tax rate (EMTR) is the combined effect on a person's earnings of income tax and the withdrawal of means testing of state welfare benefits. The EMTR is the percentage of an extra unit of income (extra dollar, euro, yen etc.) that the recipient loses due to income taxes, payroll taxes, and any decline in tax credits and welfare entitlements.

Calculating the EMTR is typically very dependent on individual circumstances and involves a consideration of welfare withdrawal rules, income tax laws, low income tax offsets, tax rebates and the individuals tax and welfare status. As such tables showing EMTRs are rarely published. The net effect however is generally a higher effective marginal rate of tax than that suggested by income tax tables."

It's very little discussed on here (mostly by me moaning on about my 63.7% EMTR which means I now dump a third of salary into pension to get it down). In my case, I noticed that EMTR can be even higher when you consider the effect of employers NI which you can recover via salary sacrifice schemes and then later withdraw from pensions without paying NI. This alone added ~10% to my EMTR.

I finally found some UK data on this. It's a bit old (2005) but interesting. More than a million have EMTR's above 60%, some above 100% (i.e you lose all your new income and more if your income increases). Since 2005, the withdrawal of child benefit from £50-60K and student loan repayments will have significantly shifted this up for many people.

Anyway, here is a chart:

1936-table1-thumb.jpg

Personal thoughts relating to this and house prices:

- Those on housing benefit will have the highest EMTR's so the least encouragement to work.

- Those paying market rents and big mortgages can't afford to lower their income. Their tax is funding those on housing benefit with the least incentive to work.

- Those without child benefit and no mortgages (oldest, tend to vote) have the lowest EMTR's. Funny that.

- Any recent graduate that aims for a decent job and have kids has the highest possible EMTR and is absolutely stuffed

- PAYE is a disaster for anyone with a good job. Contracting for the tax avoidance opportunities can dramatically lower EMTR

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Yes this is very important.

Also how about the built in lag? Tax credits are incredibly laggy, a change in income can take up to 14 months or so to be compoensated for by a change in tax credits (e.g. earnings change April 2010, tax credits don't change to compensate until June 2011)

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There's also a more intangible form of Emtr in play here - what might be called the 'peace of mind premium'.

How many of us would choose to abandon a relatively secure and predictable situation in exchange for a far less secure and more unpredictable situation for very little personal gain? I suspect not many.

Yet this is exactly proposition on offer for those who are expected to move off the welfare system and into a world of zero hour/part time/contract employment, employment that is so poorly paid that it offers little in the way of gain to offset the loss of that relative security.

The perverse outcome being that the more we try to increase employment at the bottom by deregulating the labor market, making people easier to hire and fire etc- the more people will be inclined to stay on welfare rather than take the risk of working.

It's not that hard to imagine a near future environment in which the 'threat' of workfare could come to seen as a good deal in comparison to the rat race of life at the bottom of the capitalist food chain.

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(old thread alert)

The Telegraph is catching on.

http://www.telegraph.co.uk/finance/personalfinance/consumertips/tax/10682583/Should-headteachers-pay-a-62pc-tax-rate.html

Even then, they have noticed that employers NI should be included in your marginal rate since it can be avoided via salary sacrifice.

I've had a couple of pay rises since the child benefit rules come in but taking the money now is pointless, I just have to put it into pension and hope I see some of it back later on.

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Those paying market rents and big mortgages can't afford to lower their income. Their tax is funding those on housing benefit with the least incentive to work.

Its possible that high mortgages and rents and the need 'to strive' have deprived those with high EMTR's of the ability to work, due to competition in the workplace and the fact that there is generally a shortage of full time work that pays a living wage.

The Tories make a virtue of being a striver, yet we would all be better off with lower rents and mortgages.

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