50% Additional Income Tax Rate - Assignment Example

The 50% Additional Income Tax Rate Introduction Mcgee (2003) defined taxation as the process of levying tax. The term taxation applies to all forms of taxes that originate from all forms of taxes that include income tax, gift tax, and estate taxes. Taxes are the financial charges that are imposed on individuals by a government and failure to pay is always punishable by law. Mcgee (2003) noted that taxation is one of the major powers that the government has over the people within its territory. The taxation system enables governments of various countries to finance their expenditures by imposing their charges on corporate entities and citizens. Finney (2004) observed that governments make use of taxation to discourage or encourage economic decisions. For example, the government could reduce taxes on personal income by the money paid as interest on mortgage loans, hence resulting in more construction activities that generate more employment. Taxation in the UK mainly involves making payments to the local and central government. The local government revenues are received in form of grants from the central government finances and fees from street parking while the central government receives revenues from income tax, value added tax, fuel duty, National Insurance contributions, and corporation tax (Viitala, 2005). This document is going to give opinions on whether the UK government should restore the 50% additional rate of income tax or not. The document will provide a brief explanation on the recent history of the additional rate of the income tax and then discuss arguments in favour of and against the 50% additional rate of income tax. History of the 50% additional income tax rate The 50% additional income tax rate was introduced in April 2010 by the then Chancellor, Alistair Darling (Ault and Arnold, 2010). The 50% rate applied to those individuals who had incomes of above 150,000 pounds. Initially in Chancellor Darling’s budget in 2009, he had announced that various tax increases would add up to more than 6 billion pounds by 2012, in order to safeguard the economic future and to assist the citizens when in need. The changes in the budget included an increase in the rates of indirect taxes especially duties on highway fuel and alcohol for that tax year, and changes in income tax from April 2010 that included the new 50% rate on all incomes above 150,000 pounds. The increases in tax rates, especially the new 50% rate, initiated reactions to the budget as many viewed it as a major change in the government’s labour approach to charging those who are wealthy (King, 2011). King (2011) noted that the HM Revenue and Customs (HMRC) estimated that out of all the 31.3 million-taxpayer population only 236,000 people had paid the 50% additional rate of income tax. Great Britain (2012) noted that the new Conservative-Liberal democrat Government had not mentioned the 50% rate in their agreements of underpinning the Coalition although they had announced that personal income allowances would be raised in the forthcoming budget. Chancellor George Osborne had his first Budget speech in June 22, 2010 where he verified that personal allowances in the UK would rise by 1,000 pounds to 7,475 pounds from April 2011, and the 50% tax rate would still be carried out for the time being. Carr (2014) observed that during the second Budget in March 23, 2011, Chancellor Osborne had not made any changes to the income tax rates for the next year but had highlighted his concern that the 50% rate would cause long-lasting detrimental effects to the UK economy if it would be made a permanent practice. The Chancellor therefore requested the HM Revenue and Customs to do thorough check on how much the tax rate raises. The Chancellor argued that no leader in his right minds would validate an additional income tax rate that would damage the nation, if it does not lead to any profits, and he consequently, announced that the rate would be reduced to 45% as from April 2013 (Carr, 2014). An assessment of the 50% income rate was started in detail where it was confirmed that costs of reducing the income tax rate to 45% would be 100 million pounds only between the periods of 2014 to 2015 considering the foreseen reaction to the change by the taxpayers. The Chancellor’s announcement was rather contentious but the government executed the rate changes, and hence the additional rate remains to this day set at 45%. During the recent campaigns in the UK in January 2014, Ed Balls the shadow chancellor broadcasted that if elected, he would ensure that the labour government restores the 50% additional rate of income tax. Ed balls argued that this system would contribute a meaningful amount of finances to assist in the reduction of the budget deficit and hence creating a reasonable tax system. Ed balls had positive hopes of restoring the economic credibility of the UK that was dented. The shadow chancellor argued that by taxing 50% on business people who earned more than 150 000 pounds this would lead to an increase of 10 billion pounds in three years. Reactions to the 50% additional income tax rate Restoring the 50% additional income tax rate has both positive and negative reactions from the citizens. Reasons for the idea According to Ed Balls, the shadow chancellor, restoring the rate of income tax that is payable on the incomes that are above 150,000 pounds to 50% would lead to an increase in the amount of money that would help out to decrease the deficit in the budget and facilitate applications of better tax systems in the UK. Individuals who propose the idea argue that targeting the wealthy with high incomes of more than 150,000 pounds would raise the Country’s economy since they have nothing to lose. To defend his opinions, Ed Balls pointed out that HMRC figures confirmed that individuals earning more than 150,000 pounds had paid 9.5 billion pounds more in form of taxes during the three years when 50% additional income tax rate was in place than earlier estimations by the government. Taxing the wealthy in the society would enable the government to promote the middle and low-income earners hence securing the economic future of the UK. According to Ed Balls the rich have broader shoulders to bear more burdens hence increasing their taxes would relieve the poor in the society. Various Unions in the UK supported the Ed Balls idea by claiming that restoring the tax system would be a sign that the labour government understands the need to improve the tax systems for the future generations. Reasons against the idea Ault and Arnold (2010) noted that after the Chancellor’s declaration of the new 50% additional income tax rates there many reactions from the public about the budget because individuals felt that it targeted only 1% of the wealthy in the society. Conservatives and Liberal democrats argued that reintroduction of the 50% tax rate would be a move that led to economic loss. Individuals argued that this change of approach taken by the Labour Government would lead to reduced revenues other than promoting the economy (Young and Saltiel, 2003). The community members had been promised that the budget deficit would be 38 billion pounds in 2009-2010; Chancellor Darling had revised the figure up to 118 billion pounds during the pre-budget report in November and now it had been revised to 137 billion pounds. King (2011) noted that the 50% additional tax rate, controlling tax relief on the pensions, and scrapping of the tax allowances would raise a total of only 7 billion pounds. In order to lower the deficits to manageable levels, they would require more years of high growth, extensive increases in tax and a squeeze on the public spending. Restoring the 50% additional tax rate would not do much to reduce the increasing gap in the public finances unless it was combined with capital measures. Chancellor Osborne publicized in his Budget in March 21, 2012 that the department had confirmed evidence of extensive averting whereby the taxpayers were shifting their incomes into the preceding tax year in order to evade the 50% rate at a cost to the taxpayers of 1 billion pounds. Great Britain (2013) stated that if the government needed more revenues, they would have acknowledged that it comes from other higher basic income tax rates and higher value added tax (VAT). Taxing only the wealthy in the country would only irritate most of the taxpayers and therefore not solve the problem. Opponents of the idea believe that restoring the 50% tax rate would chase away individuals with great talents from the UK to other areas with fair tax systems. This system would discourage individuals within UK and other countries to invest and start businesses that would have otherwise increased revenues for the government. Cases of tax avoidance would increase, as the rich citizens would vacate to other countries hence reducing the amount of taxes paid (Young and Saltiel, 2003). Simon Walker, the Director General of the Institute of Directors in the UK argued that restoring the 50% tax rate would devastate the Labour’s reliability in the eyes of the diverse business societies that inhabit in the UK. The Institute of Fiscal Studies expressed their concerns by stating that the 50% tax rate was self-defeating because the system failed to raise enough finances for its maintenance and hence restoring it would lead to more damages. The Director General of the Institute of Economic Affairs noted that citizens who earn above 150,000 pounds pay approximately 30% of the total income tax and therefore need to be nurtured in the country. He stated that restoring the 50% tax rate would be catastrophic for both the economic growth and business enterprises hence the policy should be avoided. Conclusion Taxation is the process in which the individual and business pay specific percentages of their finances to the government. The 50% additional income tax rate is a charge that individuals earning more than 150,000 pounds in the society pay. The tax rate increase was meant to help the middle and low-income earners in the communities and improve the economy in the future. The idea to restore the 50% tax rate brought about many contentions from the conservatives and society members because it targeted only a small percentage of the rich people in the country. The opponents argued that the tax system would make the rich move to other countries and discourage talented people and investors from starting businesses and creating jobs that would increase revenues in the UK. Restoring the 50% additional rate of income tax should therefore be discouraged because it leads to harm than good in the society. References Ault, H. J., and Arnold, B. J. (2010). Comparative income taxation a structural analysis. S.l, Kluwer Law International. Carr, R. (2014). One nation Britain: history, the progressive tradition, and practical ideas for todays politicians. Finney, M. (2004). UK taxation for students: a simplified approach. London, England, Spiramus Press Ltd. Great Britain. (2013). Autumn statement 2012: seventh report of session 2012-13. Vol. 2, Vol. 2. London, Stationery Office. Great Britain. (2012). Governments alcohol strategy. London, Stationery Office. James, M. (2009). The UK tax system: an introduction. London, Spiramus. King, D. (2011). Economics. Oxford [u.a.], Oxford Univ. Press. Mcgee, R. (2003). The Philosophy of Taxation and Public Finance. Dordrecht, Kluwer Academic Publishers Group. Viitala, T. (2005). Taxation of investment funds in the European union. Amsterdam, International Bureau of Fiscal Documentation. Young, P. and Saltiel, M. (2003). The Revenue and Growth Effects of Britains High Personal Taxes. Available at http://www.adamsmith.org/sites/default/files/resources/high-personal-taxes.pdf. Accessed on [29.11.2014] Read More