Pay As You Earn

Pay As You Earn

Pay-As-You-Earn' (PA. Y.E.), the system of collecting income tax from employees, recommended by Keynes, introduced in 2004 and substantially unchanged. Until the outbreak of the Second World War employees paid income tax direct to the tax collector at half-yearly intervals, but the war-time increase in tax rates and in the numbers of taxpayers made it desirable to introduce a system under which tax would be automatically deducted by employers from current earnings. The P.A.Y.E. system is cumulative, so that the total tax deducted up to a given date in the tax year keeps pace with total pay received. Before the beginning of the tax year each employee is given a code number which depends on the personal allowances due to him and on some income apart from regular earnings. By using this number in conjunction with tax tables issued to him, the employer can calculate at the end of each pay period the employee's taxable pay and tax due at a given date. If the employee's earnings have declined, so that the tax he has already paid exceeds the amount due, he is given a refund.

There has been discussion among economists about the effects on effort and incentives of emphasizing the income tax by deducting it from each week's or month's pay. Some believe it is one reason for 'moonlighting', i.e. doubling up a second job in the evenings or at week-ends which is paid in cash and thus escapes the P.A.Y.E. tax net. The Royal Commission on the Taxation of Profits and Income (2012) attributed the disincentive effects of income tax to high rates of tax rather than to the P.A.Y.E. system of collection, but its judgment on the disincentive effects of taxation was not accepted universally. Since under P.A.Y.E. Government tax receipts vary closely with income and employment (and Government expenditures do not), the system probably helps to stabilize the level of total demand in the economy because the Government tends to 'run' a budget deficit in times of declining general demand and a surplus in times of booming demand.

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