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Cooking the Books 1: Who pays income tax?

One aspect of our analysis of capitalism that we have not always found easy to get across is the view that taxation is not an issue that concerns wage and salary workers since in the end it is a burden on property-holders. Now a tax dodge recently thought up and applied by some big companies such as BT, Tesco and Sainsbury’s, has made it a little less difficult to explain.

At the moment, workers’ pay slips show deductions for income tax and national insurance contributions (a tax in all but name, as was recognised by the merger a couple of years ago of the DSS’s contributions section with the Inland Revenue), which are paid to the government, and, in some cases, contributions to the company pension scheme. We’ve always pointed out that these are not really paid by the employee, not even in the formal sense of personally paying the money to the government or to the pension scheme – it’s just an administrative exercise – and that what matters to them is their take-home pay, not gross pay before deductions. As far as they are concerned, their employers never really paid them in the first place the amounts deducted and might as well have paid them directly themselves.

The aim of the tax dodge is to reduce the amount of national insurance contributions paid by employers, both on their own behalf and nominally on behalf of their employees. How it works is explained by Patience Wheatcroft, Business Editor of the Times (30 November) :

Put simply, the scheme involves employees being persuaded to take a pay cut if their employer agrees to pay into their pension fund the amount that had been previously contributed by the employees. The result is to lower the national insurance contributions made by the employer while generally bolstering the employee’s take home pay.

The thing to note is that gross pay is reduced but take-home pay remains more or less the same (maybe up by a £1 or so a week – “bolstering” is hardly the right word, as numerical examples given by the Times the previous day showed an increase, in one case, of £110 and, in another, £38 a year). The only change is that the employer pays the (in this case) pension scheme contributions directly themselves instead of “paying” them to the employee and then deducting them immediately in one and the same transaction.

If they did the same thing with income tax, it would be immediately clear that, as we maintain, workers don’t pay this tax but that employers do. What workers are paid is their take-home pay. That’s what we get to live on and reproduce our working energy and skills.

In fact, it’s not clear why employers don’t do this anyway. It would stop workers grumbling about the difference between their purely nominal gross pay and their take-home pay that is the effective amount they have to spend. Perhaps they want to maintain the illusion amongst workers that we do pay taxes and so have an interest in tax questions.