Restoring the 50% Additional Rate of Income Tax - Assignment Example

Should the UK government restore the 50% additional rate of income tax?” Introduction UK is being regarded as one of the few nations in the world which has higher income tax rates, which can be illustrated by the following graph. (Source HRMC 2012:30). Due to higher income tax rates, it is alleged that UK’s competitiveness has lost and hence, it is having a direct impact on its economic growth. Britain should learn from the OECD nations which have reduced their income tax rates to stimulate their economic growth. However, by increasing the income tax rates to 50%, UK has lost its competitive position as being a low-tax regime.When Margaret Thatcher came to power in 1979, she reduced the income tax rates from whooping 83% to 60%. 1998 Nigel Lawson’s budget reduced the income tax rate again to 40%. On 6 April, 2010,the 50% additional rate of income tax was introduced. It was the first ever increase as the highest rate of income tax in the history of UK for over three decades. The top rate of income tax on the earned income in the UK was 60% in the early 1980s. The income tax reforms introduced in the UK in the 1988-89 reduced the top rate to 40% (HMRC: 23). In 2010,the Chancellor Alastair Darling announced the 50% tax rate. With effect from April 2010 onwards, taxable income above £150,000 in UK will be subject to a new top rate of income tax of 50%.The 50% additional rate of income tax was announced by the erstwhile labour government in 2010 was mainly intended to rescue the UK’s economy after the 2008 financial crisis. As per HMRC data, £10 bn was raised during the three years when the top 50% rate was in force. The present UK government has reduced the top rate to 45% with the effect from April 2013 onwards. Evidence from UK and around the globe demonstrates that punitive tax levels either 50% or 45% will result in poor revenue collection as compared to modest rates. Young & Saltiel (2013) study found that behavioural reaction to the higher tax rates is more robust, and this is likely to hurt UKs tax receipts. The 50% additional rate of income tax in UK had a bad impact on UKs economy as its architects themselves confessed that the scheme was introduced without economic objectives. Young & Saltiel (2013) found that the policy is heading for failure as it resulted in the flat growth for a decade and ended in £350bn of lost revenue. This essay will analyse whether the UK government restore the 50% additional rate of income tax?” or not . Re-Introduction of 50% additional rate of income tax in UK and its Pros and Cons As per Ed Balls of Labour Party, that his party will reintroduce 50% additional rate of income tax for those whose annual income is above £150,000 if it is voted to power in the coming election. According to him, as per recent statistics, those who are earning more than £150,000 paid £ 10bn more by way of taxes in the last three years starting from April 2010 when the rate was 50% for them. Again, it was reduced to 45% in 2013 by the present Coalition government. As per Ed Balls, when the deficit is large and as UK has not yet recovered completely from the economic recession of 2008 and from the current Euro crisis, the average family income in UK is falling down and but taxes have been set at high rates. At such a situation, there is no other way but to raise the taxes from those who are affordable to pay more (those who are in the bracket of annual income of more than £150,000). Thus, he alleged the present UK’s Coalition government has announced a big tax cut to the richest people in the UK. Else, we can construe that political lobbying by the richest people is strong and makes the UK Coalition government to dance to their tunes (Urquhart 2014). As per Ed Balls,as a prudent economic exercise to reduce the government budget deficit, increasing the tax rate to 50% to high income-group people is only available option for UK as of now (Urquhart 2014). Supporters of the high tax rate for high-income group argue that government should not go out of way to help just 1% of the population who are comprising a high income group rather than filling in the deficit of the budget deficit in the interest of UK publi. (Urquhart 2014). However, those in favour of tax cut argue that when lower tax is in force, it will generally bring more to the exchequer than that of higher tax rates.As per Simon Walker of Institute of Directors of UK, if the Labour government wants to reintroduce the increase in income tax rates as in 2010 in the future, it would definitely destabilise their trustworthiness among UKs business community. As per him , the Labour government “ the 50% tax rate” which ended up in 52% due to national insurance contributions , will definitely bring great damage to the Britain’s claim as a low-tax regime and actually , the scheme resulted in fall in the tax receipts . As per him, Labour party move to increase the tax rate again is the political stunt intended mainly to create a wedge between voters or to attract the votes from down-trodden and middle class Britains (Urquhart 2014). Critics argue that higher tax rates will push the corporates to move their business to tax heavens, which are adjacent to UK.By structuring the holding companies in tax heavens, some internationals companies in UK are able to declare their revenues in the foreign tax heavens, despite the fact their earning of those revenues in UK. For instance, Starbucks paid a just £8.5 m by way of corporation taxes in UK for the revenue of £ 3 bn earned in UK alone.Further, Google paid just little £ 6 mn as tax on a revenue of £ 395m whereas Apple paid a little £14.4 mn as tax on their UK revenue of £1 bn. It is averred that Apple’s genuine tax bill would likely to be around £ 570m.These multinational companies employ the loopholes in UKs income tax Act and through legally available tax planning methods, these companies are successful in reducing their tax liabilities to a bare minimum level thereby creating heavy losses to UK exchequer. (Wright 2012).Critics argue why UK government whether it is Labour or Conservatives or Coalition government has not taken steps to increase the corporate income tax rates to plug the budget deficit? Why they are targeting high networth individuals’ instead of multinational companies operating in UK with a high turnover but less tax? If these questions are answered, then, high rate of income tax on high networth individuals might be rationalised. From the following graph, we can understand that there is a close association between the number of individuals with high net income of above £150,000 and high personal income tax rates: In 2008-09, there had been a fall in the number of individuals with net income of above £150,000 as UK was impacted by global economic recession. Likewise, the number of high-income people also declined when 50% rate of income tax was announced in 2010-2011 (Source HRMC 2012:30). Source (HRMC 2012:30). Conclusion As per KPMG (2011) study, there are very less number of nations in the world with high income tax rates as high as the UK.UK ranks as the 5th highest nation in charging high personal income tax. High personal income tax may dissuade skilled persons to work in UK and there may be a dearth of professionals especially in banking, information technology, medical, engineering,etc.Hence,UK tax system requires to be modest so as to entice foreign direct investment, skilled labour and so as to permit businesses to function properly.If one analyse the chief desirable elements of a tax system, the UK falls short of it. By charging as high as 50% of personal income tax, the UK tax system appears to be far from ideal. As per Padovano & Galli (2002), a ten percent upsurge in the marginal tax rate could minimise the annual growth rate by about 0.25%.Over a decade ,this could tantamount to about 2.5% of GDP of a nation. As per OECD tax and growth study((2010) , a fall of 5% points in the marginal income tax rates could increase the level of GDP per capita by about 1% in the long run (HRMC 2012:11). A high rate of personal income tax may result in behavioural responses like engagement in tax avoidance,tax planning,tax evasion, migrating to tax heavens and forestalling as what happened in the year 2010-11.It is to be noted that the number of high-income people also declined when 50% rate of income tax was announced in 2010-2011.The behavioural reaction to the higher tax rates is more robust, and this is likely to hurt UKs tax receipts. Higher personal income tax rate is likely to result in flat economic growth and lost revenue to UKs exchequer. A ten percent increase in the marginal tax rate could minimise the annual growth rate by about 0.25% and a fall of 5% points in the marginal income tax rates could increase the level of GDP per capita by about 1% in the long run. Hence,in view of the above,it is strongly advocated that UK government should not restore the 50% additional rate of income tax for the sake of UK’s future. List of References HMRC.(2012) The Exchequer Effect of the 50% additional income tax rate. London: TSO Urquhart, C.(2014) Labour will restore 50p top rate of income-tax, Says Ed Balls. [online] available from >http://www.theguardian.com/politics/2014/jan/25/labour-50p-top-rate-income-tax-ed-balls > [accessed on 29 November 2014] Wright, O.(2012) HRMC Chief Denies Turning Blind Eye to Global Giants Avoiding Massive UK Tax Bills. [online] available from http://www.independent.co.uk/news/uk/politics/taxman-admits-government-powerless-to-force-multinationals-to-declare-profits-8282771.html [accessed 29 November 2014] Young and Saltiel.(2011)The Revenue and Growth Effects of Britains High Personal Taxes. [online] available from [accessed on 29 November 2014] Read More