Part III: Yes, Taxes Change Behavior

October 8, 2025 by Dan Mitchell @ International Liberty

Part I of this series looked at how the capital gains tax discourages old people from selling their homes.

Part II of this series looked at how a so-called luxury tax was distorting the vehicle market in Australia.

For our third installment in the series, we’re going to look at the impact of marginal tax rates in the United Kingdom.

We’ll start with this chart showing – as income rises – both average tax rates (what share of overall income is taken by government) and marginal tax rates (what government takes if you earn additional income).

As you can see, the marginal tax rates jumps substantially – up to 60 percent – once income hits £100 thousand.

This means a taxpayer earning £100K who earns another £1,000 will only keep £400 pounds. Politicians will grab the other £600.

The chart comes from an article in the U.K.-based Telegraph by Fran Ivens and Madeleine Ross. They have a powerful example of how this high marginal tax rate discourages work.

Here are some excerpts.

 

David…has gone to extreme measures to make sure that his income doesn’t creep over £100,000. He has taken pay cuts, gone part-time and carefully kept a spreadsheet of his earnings, all to make sure he avoids the tax trap that leaves high earners thousands of pounds a year worse off. … 

To ensure he earns less than £100,000, he has taken a 9pc pay cut by choosing not to work in February, and instead goes on holiday for four weeks. He also works just three days a week on average. … 

Without his deductions, David estimates his salary last year would have been around £120,000, but instead he keeps it at £99,000. …Those earning between £100,000 and £125,140 face the highest effective tax rate, as they lose £1 of their £12,570 personal allowance for every £2 earned, until it completely disappears. Although on paper they pay 40pc tax, it means their effective tax rate is actually 60pc. … 

For a pilot like David, this means if his company offers £600 for a day’s overtime it is reduced to £240 because of the effective 60pc tax rate. …The 60pc tax trap has existed since Alistair Darling, Gordon Brown’s chancellor, introduced the tapering of the personal allowance in 2010.

Gordon Brown was a terrible Prime Minister, so no surprise things worsened during his tenure. There are two other passages from the article that merit attention. 

First, some pilots take much bigger steps than David.

David has seen many of his fellow pilots move to the Middle East to work for airlines based there, to take advantage of the much lower taxes.

In other words, it’s not just millionaires that are escaping the United Kingdom.

Second, the number of households getting hit by the punitive 60 percent rate is climbing.

This year, 725,000 workers will fall into the 60pc tax trap – more than double the 300,000 in 2018 – according to figures from HMRC. The number of workers caught in the 60pc tax bracket is expected to soar to 850,000 by 2028-29.

One reason the number is climbing is that another terrible Prime Minister, Rishi Sunak, eliminated inflation indexing. This means politicians profit from bad monetary policy since taxpayers can get pushed into higher tax brackets even if their inflation-adjusted incomes haven’t changed.

P.S. The article also notes that implicit marginal tax rates can be very high for households with young children.

Here’s the chart showing that it is possible to have more disposable income at £99.9k as opposed to £144k.

The bottom line is that “phase-outs” of all kinds have the same impact as higher marginal tax rates. This is a non-trivial problem with redistribution programs in America that punish poor people for trying to escape dependency. This is sometimes know as the “poverty trap.”