The chart below (see table for details) shows my income and taxation over the years starting with my first full year of self-employment in 1977. I first became unemployed in 1991. All monetary values have been inflation-corrected to the 1999 value of the £.
The black trace indicates my gross income. This is the total gross profit of my business while self-employed, and my total received income while unemployed. It includes 'Child Benefit', although what most people think of as income is their salary or profit excluding 'Child Benefit'. It is well to note, however, that the DSS includes Child Benefit as part of 'what the law says you need to live on'.
The purple trace indicates my net income. This is the money I actually received. In other words, it is my gross income, less all direct taxes, namely:
I do not pay for the actual water I receive. Instead, I am required to contribute to the provision of water for the community as a whole (including myself). The water rate I am required to pay is therefore a tax: not the price of the water I use. The same is true for the house rates.
I had a few odd one-day jobs supporting old clients who were still running my software for the first few years of my unemployment. These account for the non-coincidence of the black and purple traces in those first few years of unemployment.
The yellow trace indicates my real income, that is, the money I receive and can spend free of both direct and indirect taxation. It is calculated as my net income, less 14%. This 14% is what is, on average, thought to be the overall effect of indirect taxation, comprising:
Dividing total tax (gross income less real income) by gross income gives the percentage by which my gross income was actually taxed. This percentage is shown in the following chart for each of the years from 1977 to 1999.
Comparing this chart with the first chart shows that the years in which my percentage taxation was the highest were not the years in which my gross income was highest. My overall percentage taxation reached its highest value of 54% in 1987 when my gross income was £30,000. In 1985, when my gross income was almost £48,000, my total percentage taxation was only 32%.
While self-employed, my tax was paid during the year after that of the income to which it applied. However, this is not the reason for the above. In these charts, the income for each year is associated with the tax actually levied on that year's income. Tax is shown as a percentage of total income: not as a percentage of so-called taxable income.
In the UK today, ordinary people do not have physical, legal or practical access to the basic resources they would need in order to transform their own labour into their own needs of life. A minimum amount of money or 'vital income' is therefore needed to sustain life - ie for food, clothing and shelter. The closest thing to the concept of 'vital income' at present is 'tax-fee pay'. Tax-free pay is an amount you can 'earn' free of tax. Tax is levied only to the amount you 'earn' above this tax-free amount. However, this 'tax-free pay' does not apply to every kind of tax.
In any case, the thresholds for income tax and national insurance are different. National insurance also has an upper limit. This effectively reduces the relative tax burden on the very highly paid. It is all [deliberately?] very confusing.
When I set my little computer program to compute my total effective taxation on what is called 'taxable pay', guess what, I got lots and lots of 'division by zero' errors. My little program was having to compute what percentage a large finite amount of tax was of zero taxable pay. This meant that, in effect, the total rate of tax was infinite.
The upshot is that there is not really a protected tax-free income which guarantees that everybody is at least able to get their basic needs of life. The amount any individual ends up with is determined by caprice in a turbulent cauldron of uncoordinated incompatible incomes, allowances, benefits, rates and taxes.
The symptoms suggest that those who decide tax rules do so from a grand picture of the national economy from which they form a model of the generic taxpayer for each income level. But there is no such thing as a generic taxpayer. A national economy is a complex dynamical system. It gives rise to an astronomical number of situations which place each of its members in his own unique circumstances. The generic taxpayer may fair acceptably, but the real one can easily find himself trapped between the Devil and the Deep Blue Sea.
The only way the individual may be taxed fairly and safely is by designing tax rules not from a grand picture of the national economy but from a fractal picture of the inputs & outputs of the individual household and business. These rules must guarantee that neither income, spending nor taxation for any real individual, household or business are able to veer outside safe operating limits. Then, I surmise, the national economy will, by direct consequence, automatically take care of itself.