50% Additional Rate of Income Tax in the UK - Essay Example

FIFTY PERCENT ADDITIONAL RATE OF INCOME TAX by United Kingdom is a country faced with very high taxes. The fifty percent increase in the income tax rate was introduced in the 2009 budget by Alistar Daling who was the then Chancellor. It was among the several tax rates increased in order to achieve the goal of raising over £6 billion. The 50% rate was imposed on incomes higher than £150,000. This led to mixed reaction to the budget as taxing the wealthy was seen as a very major change in the labor government. Questions were raised as to whether this change would raise the funds anticipated by the government. In the 2011 budget, Mr. Alistar made no changes on the income tax rate but stated that if the tax rate remained permanent, it would lead to long lasting damage to UK’s economy. Since 2009 when the tax rate was introduce, to date, the tax rate has been questioned and changed on several occasion in the budgets. In the 2012 budget, Mr. Osborne, who was the Chancellor by then, announced a tax cut from the 50% to 45% and thus the taxpayers could escape the 50% tax rate at a cost of £1 billion to the taxpayer. This tax rate change was implemented by the Government and the additional tax rate has since remained at 45%. There have been many discussions as to whether the tax rate should remain at 45% or be added back to 50% (Seely, 2014:21). This paper argues against the restoration of the 50% additional rate of income tax by the UK government. Several arguments have been brought forth against of a restored tax rate of 50%. One of the arguments is that a low tax rate has an affirmative impact on output, and employment because it offers incentives to boost these activities. If the taxes are raised, people avoid the kind of work that attracts high tax rates. This means that if people do not carry out work that has high tax rate, the output in the country is reduced and the same happens to the level of employment. With unemployment and output levels reduced, then this additional tax rate will act as a barricade to economic growth, and thus Britain will lag behind other nations on matters regarding the growth of the economy. Raising the tax rate will castigate activities that are taxed. The overall result of this is that less tax is attained because the more something taxed then the less is gotten from it. Since some people have built up enough capital that they can contentedly leave on, high taxes push such people to quit working or even work less. Those that continue working stop working hard in order to avoid earning extra amounts. The effect of reduced work, output, and employment is that the national income of a country decreases drastically (Grecu, 2004:34). Another argument against the additional 50% tax rate is about the young professionals. This new tax rates make Britain less competitive and therefore many young Britons opt to leave the country in order to find better jobs. They do not want to build their careers in the UK because of the fear that the taxes would go higher than the 50%. The younger working class Britons would like to migrate from the country due to the economy’s poor state while those with higher education would like to migrate due to the lack of work prospects. This means that imposing the additional 50% income tax rate on the people leads to the migration of the young people since the professionals that work abroad earn £20,000 more than what they would earn if they would be in U.K. Therefore, the income tax rate should be reduced in order to prevent the young from emigrating and living a workforce in U.K consisting of just the elderly people (Young & Saltiel, 2011:45). A good and successful tax system is aimed at making the poor people reach and equally distributing the wealth in a nation. It is not aimed at making the wealthy people poor. The additional 50% tax rate on income targets the rich people. This results in punishing the rich as well as the poor. In general, when the rich are punished for their success, the whole country becomes poor and therefore struggles with increasing poverty levels. This in turn leads to more economic and social problems such as increased crime rates, more incentives to raise the wealth and living standards of the nation, poor health and health care systems among others. Other sectors of the economy are the industries, whereby they are unable to find employees to work in their U.K based industries. This is due to the 50% tax rate whereby employees find it difficult to work so hard and at the end of the day have to pay high taxes to the government and go home with very little income (Luttman, 2008:61). This has thereby led to poor quality services in the industries and low profits for the industries. Another sector affected by this tax rate is the sports sector whereby those who earn income from sports are getting overtaxed. Several arguments in favor of the 50% additional tax on income in the U.K have been brought forth. These arguments are very few and therefore they cannot be relied upon in the implementation of the additional tax rate. The treasury is determined to raise £7 billion every year by taxing the rich. This amount will help offset the amount collected by losses in the VAT and other indirect taxes that are hidden in the budget. This tax raise will raise more revenue in the economy than has ever been raised by other tax rates. The revenue earned can be used to improve other sectors of U.K’s economy such as the health care system, the education sector and other sectors (Seely & Great Britain, 2005:24). Other people supported this tax rate as they saw it as a way of ensuring that the wealth is equally distributed in the country. Their view was that if the rich are subjected to a higher tax rate, it cuts down their income to a level that is almost the same as that of the middle class people. This means that the gap between the wealthy, the middle class and the poor is significantly reduced. With the gap reduced, the peace between these social groups is maintained and discrimination in all sectors of the economy based on social status is reduced largely. This also creates competition as people will want to work more in order to earn more, leading to more revenue to the government (Parker, 2013:54). The tax rate can also work as a way of increasing investments in the country. Having more than one way of earning income increase the chances of having more wealth even after taxations. Since most Britons try so hard to accumulate wealth, it leads them to making numerous investments. These investments are advantageous to the government since they become new sources of more revenue (Tax Law History Conference, Tiley & University of Cambridge. 2004:27). Although arguments have been made in favor and against the 50% additional tax on income, it can be seen that arguments against the tax rate outweigh the arguments in favor of the tax rate. It is clearly noted that the additional tax causes more harm to the economy then the good it would cause. It makes the United Kingdom less competitive as compared to other nations. This tax rate does not just affect the rich but it affects the economy as a whole. It may have a few positive impacts on the economy of U.K but its negative effects are more (Brown, Looney & Urban-Brookings Tax Policy Center, 2012:32). The tax rate does earn the expected amount by the treasury but at the same time, it leads to the government losing on a lot of revenue that it could have gained if the tax rate was lower. Therefore, the 50% revenue should be eliminated to avoid losing more revenue. The proof that the additional tax should not be implemented is that if the taxes imposed on the people are low, then there is a higher desire to engage in more income generating activities. As more people engage in this, tax revenue increases. Heavy taxes levied on the people overburden them and eventually reduce the desire to work more. As income and profits decrease, the amount of total revenue also decreases. When the desire for activity is reduced and finally it is completely gone, then civilization is destroyed. The largest population of U.K feels that the government should do away with the 50%additional tax rate. On the other hand, some politicians support that the tax rate should be imposed on the people as a way of punishing the rich. Since in most cases the politicians are not affected by this tax rate, then the tax reduces the wealth of the rich and therefore eliminating competition to the politicians. Having looked at the different opinions of the Britons regarding the tax rate, then it is wise to eliminate it. The best way to do this is to lower the tax rate as much as possible in order to get higher chances of earning more revenue and to avoid paralyzing some sectors of the economy (Tiley, 2004:34). In conclusion, United Kingdom is a country with very high taxes. The fifty percent increase in the income tax rate was introduced in the 2009 budget by Alistar Daling who was the then Chancellor. This tax proposal has brought about concerns from different quarters especially because the current income tax is high. As stated in the paper, the 50 percent additional rate of income tax should not be implemented because heavy taxes levied on the people overburden them and eventually reduce the desire to work more among other reasons. References Brown, S., Gale, W., Looney, A., & Urban-Brookings Tax Policy Center, 2012, On the distributional effects of base-broadening income tax reform. Washington, D.C.: Urban-Brookings Tax Policy Center. Grecu, A 2004, Flat tax: the British case. Adam Smith Institute. Luttman, S 2008, Advances in taxation: Vol. 18. Bingley, U.K: Emerald. Parker, S 2013, The squeezed middle: The pressure on ordinary workers in America and Britain. Bristol: Policy Press. Seely, A 2014, Income tax: the additional 50p rate. London: House of Commons Library. Tax Law History Conference, Tiley, J, & University of Cambridge. 2004, Studies in the history of tax law. Oxford: Hart. Seely, A., & Great Britain 2005, Direct taxes: Rates and allowances 2005-06. London: House of Commons Library. Young, P, & Saltiel, M 2011, The Revenue and Growth Effects of Britains High Personal Taxes. Adam Smith Research Trust. Read More