{"id":8410,"date":"2022-11-16T09:00:33","date_gmt":"2022-11-16T09:00:33","guid":{"rendered":"https:\/\/www.taxpolicy.org.uk\/?p=8410"},"modified":"2022-11-21T19:46:06","modified_gmt":"2022-11-21T19:46:06","slug":"taxthelawyers","status":"publish","type":"post","link":"https:\/\/heacham.neidles.com\/2022\/11\/16\/taxthelawyers\/","title":{"rendered":"The first thing we do, let&#8217;s tax all the lawyers."},"content":{"rendered":"\n<p><strong>The UK taxes high-earning lawyers less than bankers. That&#8217;s irrational &#8211; and illustrates a wider problem with the tax system. It&#8217;s hard to change, but we&#8217;d all benefit if we taxed all income in the same way.<\/strong><\/p>\n\n\n\n<p>Here&#8217;s the problem:<\/p>\n\n\n\n<ul>\n<li>A City law firm has \u00a3100m of profits to share between 100 partners.<sup class=\"modern-footnotes-footnote \" data-mfn=\"1\" data-mfn-post-scope=\"0000000000002f4e0000000000000000_8410\"><a href=\"javascript:void(0)\"  role=\"button\" aria-pressed=\"false\" aria-describedby=\"mfn-content-0000000000002f4e0000000000000000_8410-1\">1<\/a><\/sup><span id=\"mfn-content-0000000000002f4e0000000000000000_8410-1\" role=\"tooltip\" class=\"modern-footnotes-footnote__note\" tabindex=\"0\" data-mfn=\"1\">Some people unfamiliar with City law firms may be shocked at how large these figures are; some people who work in City law firms may regard this as a poor level of profitability, and possibly a failing firm.<\/span> The tax consequence: each partner has gross income of \u00a31m on which they pay \u00a3435k income tax<sup class=\"modern-footnotes-footnote \" data-mfn=\"2\" data-mfn-post-scope=\"0000000000002f4e0000000000000000_8410\"><a href=\"javascript:void(0)\"  role=\"button\" aria-pressed=\"false\" aria-describedby=\"mfn-content-0000000000002f4e0000000000000000_8410-2\">2<\/a><\/sup><span id=\"mfn-content-0000000000002f4e0000000000000000_8410-2\" role=\"tooltip\" class=\"modern-footnotes-footnote__note\" tabindex=\"0\" data-mfn=\"2\">i.e. tending towards the 45% top marginal rate<\/span>, plus \u00a335k national insurance<sup class=\"modern-footnotes-footnote \" data-mfn=\"3\" data-mfn-post-scope=\"0000000000002f4e0000000000000000_8410\"><a href=\"javascript:void(0)\"  role=\"button\" aria-pressed=\"false\" aria-describedby=\"mfn-content-0000000000002f4e0000000000000000_8410-3\">3<\/a><\/sup><span id=\"mfn-content-0000000000002f4e0000000000000000_8410-3\" role=\"tooltip\" class=\"modern-footnotes-footnote__note\" tabindex=\"0\" data-mfn=\"3\">Tending towards the 2% marginal rate<\/span>. So the lucky partners take home \u00a3530k<sup class=\"modern-footnotes-footnote \" data-mfn=\"4\" data-mfn-post-scope=\"0000000000002f4e0000000000000000_8410\"><a href=\"javascript:void(0)\"  role=\"button\" aria-pressed=\"false\" aria-describedby=\"mfn-content-0000000000002f4e0000000000000000_8410-4\">4<\/a><\/sup><span id=\"mfn-content-0000000000002f4e0000000000000000_8410-4\" role=\"tooltip\" class=\"modern-footnotes-footnote__note\" tabindex=\"0\" data-mfn=\"4\">It will usually be less than this, because law firms &#8211; like most businesses &#8211; have non-deductible expenditure&#8230; in practice that will raise the effective tax rate by a couple of %<\/span>, and lucky HMRC collects \u00a347m.<\/li>\n\n\n\n<li>A bank has \u00a3100 million of profits to share between 100 traders. The tax consequence: the bank pays employer&#8217;s 13.8%<sup class=\"modern-footnotes-footnote \" data-mfn=\"5\" data-mfn-post-scope=\"0000000000002f4e0000000000000000_8410\"><a href=\"javascript:void(0)\"  role=\"button\" aria-pressed=\"false\" aria-describedby=\"mfn-content-0000000000002f4e0000000000000000_8410-5\">5<\/a><\/sup><span id=\"mfn-content-0000000000002f4e0000000000000000_8410-5\" role=\"tooltip\" class=\"modern-footnotes-footnote__note\" tabindex=\"0\" data-mfn=\"5\">There&#8217;s a good argument I should add the 0.5% apprenticeship levy, because it does behave just like another 0.5% employer&#8217;s NI. But, given it&#8217;s semi-hypothecated, I decided to leave it out. If you disagree with me on this, then that means my bigger argument has 0.5% more force.<\/span> national insurance, leaving \u00a387.9m for the bankers.<sup class=\"modern-footnotes-footnote \" data-mfn=\"6\" data-mfn-post-scope=\"0000000000002f4e0000000000000000_8410\"><a href=\"javascript:void(0)\"  role=\"button\" aria-pressed=\"false\" aria-describedby=\"mfn-content-0000000000002f4e0000000000000000_8410-6\">6<\/a><\/sup><span id=\"mfn-content-0000000000002f4e0000000000000000_8410-6\" role=\"tooltip\" class=\"modern-footnotes-footnote__note\" tabindex=\"0\" data-mfn=\"6\">I made a bad mistake here, and added the 13.8% employer&#8217;s NI to the \u00a3100m. That makes no sense, because the bonus pool was stated to be \u00a3100m &#8211; the bank is going to have to use that to pay the bonuses and the employer&#8217;s NI. Now corrected!<\/span> So each banker has a gross income of \u00a3879k, on which they pay \u00a3380 income tax and \u00a321k national insurance. So the poor bankers take home \u00a3477k, and even more lucky HMRC collects \u00a352.3m.<\/li>\n<\/ul>\n\n\n\n<p>The lawyers have an overall effective tax rate of 47%; the bankers&#8217; rate is 52.3%. That is an odd and irrational result.<\/p>\n\n\n\n<p>Why does it happen? The simple reason is that partners in a law firm are not employees, and so there&#8217;s no 13.8% employer&#8217;s national insurance.<sup class=\"modern-footnotes-footnote \" data-mfn=\"7\" data-mfn-post-scope=\"0000000000002f4e0000000000000000_8410\"><a href=\"javascript:void(0)\"  role=\"button\" aria-pressed=\"false\" aria-describedby=\"mfn-content-0000000000002f4e0000000000000000_8410-7\">7<\/a><\/sup><span id=\"mfn-content-0000000000002f4e0000000000000000_8410-7\" role=\"tooltip\" class=\"modern-footnotes-footnote__note\" tabindex=\"0\" data-mfn=\"7\">Some people will complain at this point that the bankers aren&#8217;t paying employer&#8217;s national insurance &#8211; so why include that in their effective tax rate? The answer is that the economic evidence suggests that, in the long run, the economic incidence of employer&#8217;s national insurance largely falls on wages. In my example it&#8217;s particularly clear &#8211; the bank has a bonus pool, and the employers are going to get what&#8217;s left after employer&#8217;s national insurance is paid &#8211; so it is directly reducing their income.<\/span> This isn&#8217;t tax avoidance, or even tax planning<sup class=\"modern-footnotes-footnote \" data-mfn=\"8\" data-mfn-post-scope=\"0000000000002f4e0000000000000000_8410\"><a href=\"javascript:void(0)\"  role=\"button\" aria-pressed=\"false\" aria-describedby=\"mfn-content-0000000000002f4e0000000000000000_8410-8\">8<\/a><\/sup><span id=\"mfn-content-0000000000002f4e0000000000000000_8410-8\" role=\"tooltip\" class=\"modern-footnotes-footnote__note\" tabindex=\"0\" data-mfn=\"8\">Except when it is &#8211; see the smart comment from &#8216;Tigs&#8217; below regarding salaried &#8220;partners&#8221;<\/span> &#8211; it&#8217;s an inevitable consequence of the fact that our tax system puts so much weight on whether a person is an employee.<\/p>\n\n\n\n<p>The question is whether we should change the law and tax partners in law firms and other large professional firms the same way as employees.<\/p>\n\n\n<h2 class=\"wp-block-heading\" id=\"how-much-tax-could-we-raise\">How much tax could we raise?<\/h2>\n\n\n<p>The Lawyer has crunched the numbers on large law firms, and reckon that the top 50 UK law firms and top 50 US law firms have a combined UK profit of \u00a36.3bn, implying that if they were subject to employer&#8217;s national insurance, that would yield an additional \u00a3870m of tax.<\/p>\n\n\n\n<p>The top <a rel=\"noreferrer noopener\" href=\"https:\/\/www.accountancydaily.co\/top-75-firms-survey-2022-revenue-hits-record-ps1887bn\" target=\"_blank\">75 UK accounting firms<\/a> have a profit of around \u00a33bn, implying an extension of employer&#8217;s national insurance would yield an additional \u00a3400m of tax.<\/p>\n\n\n\n<p>Add in management consultants, investment managers, and other large professional partnerships (whether in partnership or corporate form) and it&#8217;s realistic to think we&#8217;d be looking at between \u00a31.5bn and \u00a32bn of revenue.<sup class=\"modern-footnotes-footnote \" data-mfn=\"9\" data-mfn-post-scope=\"0000000000002f4e0000000000000000_8410\"><a href=\"javascript:void(0)\"  role=\"button\" aria-pressed=\"false\" aria-describedby=\"mfn-content-0000000000002f4e0000000000000000_8410-9\">9<\/a><\/sup><span id=\"mfn-content-0000000000002f4e0000000000000000_8410-9\" role=\"tooltip\" class=\"modern-footnotes-footnote__note\" tabindex=\"0\" data-mfn=\"9\">There would certainly be difficult edge cases; this post is about the principle rather than the practicality. Similarly, lots of points to think about re. non-deductible expenditure, which for some large partnerships already takes the effective rate over 50%.<\/span><\/p>\n\n\n<h2 class=\"wp-block-heading\" id=\"should-we-do-it\">Should we do it?<\/h2>\n\n\n<p>Given the economic mess we currently find ourselves in, it&#8217;s hard to defend \u00a31m lawyers paying less tax than other comparable professionals. <\/p>\n\n\n\n<p>As Catrin Griffiths, editor of The Lawyer, says:<\/p>\n\n\n<p style=\"font-weight: 400; padding-left: 40px;\"><em>All the data points to the fact that commercial law is a highly successful UK sector that relies on an infrastructure of education, training and technology. In a climate of rising taxes for all, law firms will be increasingly challenged to consider their own financial contribution to the public finances.<\/em><\/p>\n<p style=\"font-weight: 400;\">Politicians may find the prospect of an easy \u00a32bn of additional revenue tempting.&nbsp;<\/p>\n\n\n<p>And yet I pause at the idea of creating a headline tax rate of over 50%. On the one hand, that&#8217;s  already what happens &#8211; the bankers in my example above have an effective rate of 53.5%. But &#8211; and this is important &#8211; they <em>probably don&#8217;t feel like they do<\/em>.   <\/p>\n\n\n<h2 class=\"wp-block-heading\" id=\"wider-implications-and-solutions\">Wider implications &#8211; and solutions<\/h2>\n\n\n<p>It&#8217;s not just lawyers. The same distortions and difficulties arise throughout the economy.<\/p>\n\n\n\n<p>We tax employment income much more than other types of income, and that creates distortion, <a rel=\"noreferrer noopener\" href=\"https:\/\/www.gov.uk\/guidance\/understanding-off-payroll-working-ir35\" target=\"_blank\">uncertainty<\/a>, and <a rel=\"noreferrer noopener\" href=\"https:\/\/www.gov.uk\/government\/publications\/loan-schemes-and-the-loan-charge-an-overview\/tax-avoidance-loan-schemes-and-the-loan-charge\" target=\"_blank\">tax avoidance<\/a>. I&#8217;ve no doubt that employer&#8217;s national insurance is a Bad Tax and we should end it. <\/p>\n\n\n\n<p>But if we immediately abolished national insurance, and rolled it into income tax, then I fear many people would be aghast at how much tax they were paying (even if employers passed-on the benefit of the employer national insurance cut, which is distinctly <a rel=\"noreferrer noopener\" href=\"https:\/\/heacham.neidles.com\/2022\/11\/10\/tampontax\/\" target=\"_blank\">optimistic<\/a>). Tax psychology is a <a rel=\"noreferrer noopener\" href=\"https:\/\/www.cambridge.org\/core\/books\/abs\/cambridge-handbook-of-psychology-and-economic-behaviour\/tax-psychology\/E42805414C1DC45FAB042605F6E3847F\" target=\"_blank\">thing<\/a>, and (on the basis of no evidence) I worry about the overall economic and fiscal effects of people feeling like they&#8217;re paying more in tax than they take home. That&#8217;s not a reason not to act, but it&#8217;s a reason to be very cautious.<\/p>\n\n\n\n<p>This is a hard problem.<\/p>\n\n\n\n<p>There are two things that might make it easier:<\/p>\n\n\n\n<ul>\n<li>First, make the change mostly revenue-neutral. We&#8217;d be greatly expanding the base of people paying the 13.8% tax. So we don&#8217;t need the rate to be as high as 13.8% to collect the same amount. My feeling (and tax policy needs <a rel=\"noreferrer noopener\" href=\"https:\/\/www.youtube.com\/watch?v=t4QK8RxCAwo\" target=\"_blank\">more than a feeling<\/a>) is that nobody should be paying a marginal rate of over 50%.<\/li>\n\n\n\n<li>Second, mandate that employers pass on the savings. This would be a highly unusual thing to do, but in this circumstance, it might be realistically achievable<sup class=\"modern-footnotes-footnote \" data-mfn=\"10\" data-mfn-post-scope=\"0000000000002f4e0000000000000000_8410\"><a href=\"javascript:void(0)\"  role=\"button\" aria-pressed=\"false\" aria-describedby=\"mfn-content-0000000000002f4e0000000000000000_8410-10\">10<\/a><\/sup><span id=\"mfn-content-0000000000002f4e0000000000000000_8410-10\" role=\"tooltip\" class=\"modern-footnotes-footnote__note\" tabindex=\"0\" data-mfn=\"10\">The usual problem is this: when the 5% &#8220;tampon tax&#8221; was abolished, we couldn&#8217;t legally require that prices were cut by 5%, because retail prices move all the time, and it&#8217;s not possible to disentangle the tax cut from other price changes. Wages are different. It might (and this would need a lot of thought) be possible to require employers pass on an employer&#8217;s national insurance cut. That wouldn&#8217;t be a perfect solution, because an employer could pass on the cut, but at the same time scrap a wage <em>rise<\/em> that otherwise would have been paid. But it could (particularly in a time of low inflation) ensure that most of the benefit went to employees in the short term, and there&#8217;s good reason to believe that it will go to employees in the long term regardless of what we do.<\/span><\/li>\n<\/ul>\n\n\n\n<p>This would have two effects. People who aren&#8217;t employees would see a tax rise, but it would be less than the full 13.8%. Employees would see an actual tax cut. It&#8217;s just about possible this could make the whole proposal politically feasible. Maybe. <\/p>\n\n\n\n<p>All we need is a suitably <a rel=\"noreferrer noopener\" href=\"https:\/\/www.youtube.com\/watch?v=ik8JT2S-kBE\" target=\"_blank\">courageous<\/a> politician.<\/p>\n\n\n\n<div style=\"height:100px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<p>Image by <a href=\"https:\/\/labs.openai.com\/auth\/login\" target=\"_blank\" rel=\"noreferrer noopener\">DALL-E<\/a>: &#8220;a statue of lady justice, with a stack of dollar bills in her hand, digital art&#8221;<\/p>\n\n\n\n<ul class=\"modern-footnotes-list \"><li><span>1<\/span><div>Some people unfamiliar with City law firms may be shocked at how large these figures are; some people who work in City law firms may regard this as a poor level of profitability, and possibly a failing firm.<\/div><\/li><li><span>2<\/span><div>i.e. tending towards the 45% top marginal rate<\/div><\/li><li><span>3<\/span><div>Tending towards the 2% marginal rate<\/div><\/li><li><span>4<\/span><div>It will usually be less than this, because law firms &#8211; like most businesses &#8211; have non-deductible expenditure&#8230; in practice that will raise the effective tax rate by a couple of %<\/div><\/li><li><span>5<\/span><div>There&#8217;s a good argument I should add the 0.5% apprenticeship levy, because it does behave just like another 0.5% employer&#8217;s NI. But, given it&#8217;s semi-hypothecated, I decided to leave it out. If you disagree with me on this, then that means my bigger argument has 0.5% more force.<\/div><\/li><li><span>6<\/span><div>I made a bad mistake here, and added the 13.8% employer&#8217;s NI to the \u00a3100m. That makes no sense, because the bonus pool was stated to be \u00a3100m &#8211; the bank is going to have to use that to pay the bonuses and the employer&#8217;s NI. Now corrected!<\/div><\/li><li><span>7<\/span><div>Some people will complain at this point that the bankers aren&#8217;t paying employer&#8217;s national insurance &#8211; so why include that in their effective tax rate? The answer is that the economic evidence suggests that, in the long run, the economic incidence of employer&#8217;s national insurance largely falls on wages. In my example it&#8217;s particularly clear &#8211; the bank has a bonus pool, and the employers are going to get what&#8217;s left after employer&#8217;s national insurance is paid &#8211; so it is directly reducing their income.<\/div><\/li><li><span>8<\/span><div>Except when it is &#8211; see the smart comment from &#8216;Tigs&#8217; below regarding salaried &#8220;partners&#8221;<\/div><\/li><li><span>9<\/span><div>There would certainly be difficult edge cases; this post is about the principle rather than the practicality. Similarly, lots of points to think about re. non-deductible expenditure, which for some large partnerships already takes the effective rate over 50%.<\/div><\/li><li><span>10<\/span><div>The usual problem is this: when the 5% &#8220;tampon tax&#8221; was abolished, we couldn&#8217;t legally require that prices were cut by 5%, because retail prices move all the time, and it&#8217;s not possible to disentangle the tax cut from other price changes. Wages are different. It might (and this would need a lot of thought) be possible to require employers pass on an employer&#8217;s national insurance cut. That wouldn&#8217;t be a perfect solution, because an employer could pass on the cut, but at the same time scrap a wage <em>rise<\/em> that otherwise would have been paid. But it could (particularly in a time of low inflation) ensure that most of the benefit went to employees in the short term, and there&#8217;s good reason to believe that it will go to employees in the long term regardless of what we do.<\/div><\/li><\/ul>\n","protected":false},"excerpt":{"rendered":"<p>The UK taxes high-earning lawyers less than bankers. That&#8217;s irrational &#8211; and illustrates a wider problem with the tax system. It&#8217;s hard to change, but we&#8217;d all benefit if we taxed all income in the same way. Here&#8217;s the problem: The lawyers have an overall effective tax rate of 47%; the bankers&#8217; rate is 52.3%. [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":8411,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"ngg_post_thumbnail":0,"footnotes":""},"categories":[139],"tags":[112],"jetpack_featured_media_url":"https:\/\/heacham.neidles.com\/wp-content\/uploads\/2022\/11\/DALL\u00b7E-2022-11-16-11.38.24-a-statue-of-lady-justice-with-a-stack-of-dollar-bills-in-her-hand-digital-art.png","_links":{"self":[{"href":"https:\/\/heacham.neidles.com\/wp-json\/wp\/v2\/posts\/8410"}],"collection":[{"href":"https:\/\/heacham.neidles.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/heacham.neidles.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/heacham.neidles.com\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/heacham.neidles.com\/wp-json\/wp\/v2\/comments?post=8410"}],"version-history":[{"count":15,"href":"https:\/\/heacham.neidles.com\/wp-json\/wp\/v2\/posts\/8410\/revisions"}],"predecessor-version":[{"id":8440,"href":"https:\/\/heacham.neidles.com\/wp-json\/wp\/v2\/posts\/8410\/revisions\/8440"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/heacham.neidles.com\/wp-json\/wp\/v2\/media\/8411"}],"wp:attachment":[{"href":"https:\/\/heacham.neidles.com\/wp-json\/wp\/v2\/media?parent=8410"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/heacham.neidles.com\/wp-json\/wp\/v2\/categories?post=8410"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/heacham.neidles.com\/wp-json\/wp\/v2\/tags?post=8410"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}