From the comments, on the UK

This is from a loyal reader named “a”:

How high are marginal rates of deductions in the UK?:

Consider an employee paid £50,000 gross who gets a £1,000 pay rise.

Let’s assume they are yet to pay off their student loan and contribute 7.5% to a (underfunded*) pension scheme and get 8% employer contributions to their pension.

Our employee’s employer will also pay the government an extra £218 pension contributions and national insurance (payroll) contributions, 8% and 13.8% of gross earnings respectively.

So the total increase in cost to the employer is £1,218.

Of their pay rise our employee pays £75 pension contributions, £90 student loan repayments, and £370 in income tax, giving total employee deductions £555.

This gives a marginal deduction rate of 63.46% (£445/£1,218).

If our employee buys goods which are liable for VAT they will lose a further 20%, resulting in a 70.77% marginal rate of deductions.

Oh and our employee must pay a local government lump sum tax of around £1,500 from their net wages.

So our employee faces a marginal rate of deductions 63.46% on non-VAT items, 70.77% on VAT items, and an average rate of deduction of 52% of pre-deduction earnings.

A similar analysis on a worker paid the minimum wage (around £12,500 a year), or £1000 above the minimum wage results in a marginal rate of deduction of 32% and an average rate of deduction of 52%. This ignores the withdrawal of means tested benefits.

Might this be the supply side explanation Scott Sumner has been looking for?

* UK private pension schemes currently have a £265bn deficit.


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