A ndrew Hood’s ‘Fiscal policy’ column looks at how marginal tax rates and average tax rates affect people’s working behaviour. I will discuss this here but first let’s first define the word ‘marginal’. For instance, the marginal cost of a production line is the cost of producing an additional unit of product. The marginal effective tax rate (METR) is the extra amount of tax paid for the next additional pound an individual earns.
Let’s now consider people’s working behaviour. The METR influences the decision of working an extra hour. The participation tax rate (PTR) however, affects the decision about whether to work at all. From April 2014 onwards, the UK government is going to raise the income tax personal allowance from £7,455 to £10,000. This means that the METR will drop and many individuals should be encouraged to increase their working hours in response to this change — therefore there should be an increase in the total number of hours worked in the UK. However, in a recession there may be little scope for this, as employers may not need longer hours from their workers.
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