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Britain has highest marginal effective tax rate in developed world

uk_child_povertyThe government’s policy is that people should seek work and that they should be incentivised to do so. Agreed in normal circumstances, but circumstances are not normal. It is impossible for people to find work when there are 2.6 million unemployed and only 400,000 vacancies, and impossible when Osborne’s policy is to restrict job opportunities, not to increase them.

The jobless are also not being incentivised to get work when Britain’s marginal effective tax rate for those on half and three-quarters of average earnings is a staggering 73%, while the OECD average is just 34%. What this means is that for every additional £ earned, families in the OECD would on average take home 66p, whilst in the UK they would take home only 27p. Cameron in his usual airy way has laid claim to an ‘aspiration nation’, but in practice he has overseen the worst fiscal framework in the OECD for earning one’s way out of being stuck on the lowest wages.

But what about Universal Credit? Wasn’t that intended to make it more rewarding to take a job to earn your way to a higher income? Well, yes, but it doesn’t actually have that effect. Under Universal Credit the marginal effective tax rate for a quarter of the population will rise to 76% and people will only then take home 24p in the £.

Furthermore, families in the UK, particularly one-earner families with children, are dealt with disproportionately harshly by our tax system with its focus on the individual. As a result one-earner married families on an average wage bear a tax burden that is 42% greater than comparable families across the OECD. The CARE report The Taxation of Families also shows that the tax burden on these one-earner married families is three-quarters of that placed on a single person on the same wage, but only half in the OECD. The UK tax system is far from family-friendly.

This burden is placed entirely on the benefits system, and when these benefits are withdrawn as wages from work gradually rise, it causes these extraordinarily high marginal tax rates. It was not always thus. In the past the UK tax system did recognise family responsibility as well as in the benefit system. That is why there is now an urgent need to introduce a transferable allowance, and Labour should be considering including this in their manifesto.

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