4 - UK tax benefit system

Question 1

what is the UK income tax

Answer 1

• paid on amount of taxable income (after allowances)
• personal allowance = 12.5k
• taxable income = ANI - PA

Question 2

what does gov use taxes for

Answer 2

to fund transfer programs
- universal transfer = NHS, education
- means-tested transfers = WTC, public housing, FSM

Question 3

what is the UK tax system like

Answer 3

tax is a piecewise linear and continuous function of taxable income

with constant MTR by bands (4 bands)

Question 4

what are the marginal tax rates

Answer 4

• for the lower part of your earnings you still apply the lower bands + the higher bands
  0-12.5k = 0%
  12.5-50k = 20%
  50-150k = 40%
  100-125 = 60%
  125k + = 45%

Question 5

what is marginal tax rate graph T’(z) = MTR

Answer 5

• bar chart at each level

Question 6

what is individual tax graph T(z)

Answer 6

straight lines

Question 7

what is the 100k tax trap

Answer 7

• when income is over 100k, the 12.5k personal allowance drops by 50p for every £1 earned over
• once 125k reached = no PA
• so an extra 20p of tax on that marginal pound = MTR = 60% not 40%

Question 8

what is national insurance NI contributions

Answer 8

• deducted from pay

Question 9

what was the 45 billion in tax cuts?
and why was it not good

Answer 9

• abolish the 45% MTR on income above 150k
• they would still face the 40% tax rate
• hoping that it would have a trickledown effect
• proportionately helps the super wealthy more - the billionaires
• big regional differences in tax savings
• would lead to more growth if the tax cut was for lower incomes than higher = no evidence of trickledown effect

Question 10

what is the difference between PAYE and self assessment

Answer 10

PAYE
- system used by employers - do your taxes through PAYE

self
- you have to fill in tax return yourself

Question 11

who would have benefited from the cut of 45 tax rate to 40

Answer 11

• 10% of gain would go to 150-250k people
• half of the total tax savings goes to millionaires
• people that benefit the most = super rich

Question 12

what are UK tax credits

Answer 12

• they are both based on family income
  working tax credit WTC

child tax credit CTC

Question 13

what is the WTC

Answer 13

• in work support
• for low income - you have to work a required amount of hours to qualify

Question 14

what is CTC

Answer 14

• supports families with children

Question 15

what are US income tax credits like

Answer 15

in work tax credits for low income working families:
EITC = earned income tax credit
CTC = child tax credit

eligibility is based on income and number of children

Question 16

what is the difference between US and UK tax credit systems

Answer 16

UK
* provides more cash benefits to out of work people
* based on hours worked
* high phase out rate

US
* based on earnings
* EITC - doesnt pay 0 hour workers, and has high phase in rate