Taxation in the UK - Essay Example

ASB-3212 Taxation 15 Should the UK Government Restore the 50% Additional Rate of Income Tax? Submission: Introduction Taxation is the process whereby the government imposes charges on individuals or property. The United Kingdom (UK) government charges tax on property and individuals to raise funds and finances for public purposes (Young & Saltiel, 2011). The philosophy of taxation is that charges or tax is imposed to support the activities of the government in exchange for the general benefits and protection that the government offers to the taxpayer and their property or properties (Kavanagh, 2006). The presence of government is a need that cannot endure without funds and financial means to pay its expenses (Young & Saltiel, 2011). Therefore, in its logical reasoning, the government possesses the right to oblige all citizens and or property within its limits to help it in sharing its costs (Kavanagh, 2006). In the same way, it is every taxable UK citizens responsibility or property to remit their taxes as required by the tax authorities in the land (Kavanagh, 2006; OECD, 2010). However, over the years, the UK has evolved to become among the highest and uppermost taxed countries globally (Young & Saltiel, 2011). Since 1997, while most OECD countries have taken measures to reduce their tax burdens, the British taxation continues to rise, instigating the country to lose its competitive as a low tax administration (Merrick, 2014; Seely, 2014; OECD, 2010). Recent History of additional Income Tax In the UK, more taxpayers are being obligated into higher tax rate brackets. For instance, the amount of taxpayers in the band of 40% nearly doubled between the years 1997 to 2008 from just over 2M to almost 3.7M respectively (Kavanagh, 2006; Seely, 2014). Additionally, has increased the number of people subject to higher bracket tax rates (Young & Saltiel, 2011). The UK budget of June 2010 reduced the tax threshold of 45% from 50% of earnings from £43,875 to £42,475 with effect from April 2012. In Britain, many people are overwhelmed by tax and have begun looking for various ways of tax evasions (Merrick, 2014). While the current government reduced the tax rate, the 50% tax rate has become a central campaign issue for politicians and policy makers in the buildup to the next UK election (Nelson, 2008). Some may ask why the 50% rate is very important (Young & Saltiel, 2011; Seely, 2014). In the UK anyone receiving or entitled to a “taxable” income, for instance, salaries, interest on savings or pensions, is subject to government income tax. After an allowable “personal allowance” placed at £9,440 (that is due to upsurge to £10,000 as from April) individuals pay tax according to “bands or brackets” of income. Presently, in UK, a “basic rate” of 20% is charged on income of up to £32,010, while a “higher rate” spread over to individual’s income from £32,011 to £150,000 (Young & Saltiel, 2011). According to the Shadow chancellor, Ed Balls, Labour Party has a plan to reintroduce the 50% rate of income tax for individuals earning £150,000 and above if Labour wins next year’s election (Young & Saltiel, 2011). Under Labor’s proposal, half of all earnings above £150,000 would proceed to HM Revenue and Customs (HMRC), as a replacement for the present 45%. In his argument for the proposed rates, the chancellor said the present coalition government had provided the wealthy and the rich people in the UK an enormous tax reduction when it scrapped the 50% top rate. Ed says that is something that cannot be right for the UK citizens. Back in 2012, Labour Party was defeated by the House of Commons in its bid to block the reduction (Young & Saltiel, 2011). Arguments of and against the Restored 50% income tax rate Labour Party has not approximated how much the 50% will collect for the country. However, in an assessment by HMRC in 2012, which the Office with budget responsibility termed “reasonable” produced an estimate for the 40% (Young & Saltiel, 2011). According to the estimate cutting the top tax rate from 50% to 45%, would cost the country £100m a year. Responding to this estimate, Mr. Balls argued that in the three years where the 50% tax was imposed (after amassing the top tax rate from 40% to 50%) raised nearly £10 Billion more than the assessment estimate suggested (Petson, 2014; Seely, 2014). Additionally, responding for Labour, Balls said that the impact of restoring the tax rate to 50% would be greater than estimated £100m. He argued that it would be so because tax liabilities for individuals earning £150,000 or more in the period of the assessment were higher than the tax body previously thought (Merrick, 2014). The proposers of the 50% rate argue that it is the best rate that UK should adopt (Merrick, 2014). The United Kingdom union activists said promising to reinstate the 50% rate exhibits that Labour recognizes the need for a reasonable taxation system in UK (Financial Times, 2010; Brewer & Browne, 2009). In their argument, they said “Voters will now know that Labour Party is evolving as a positive option for UK (Petson, 2014). Additionally, the director of UK’s Think Tank Tax Research, Richard Murphy, said that the 50% tax rate “functioned” but was underestimated by its short tenure. Murphy argues that the UK is “seeing an enormous rise in inequality” and therefore the 50% rate would support “balancing up” of the economy (Pym, 2014). According to Petson (2014), in response to the Labour Party’s demands and suggestions, the coalition parties argue in different voices, most of which are against the raise. Conservative Treasury minister Mr. David Gauke argues that the 50% top rate would accumulate or raise little, if anything. He shares his conclusion with a backup from the HMRC assessment (Young & Saltiel, 2011). In 2012, while scrapping the 50% top tax rate in his budget, Chancellor George Osborne outlined that the 50% “damages the UK economy but raises almost nothing” (Petson, 2014; Davis & Henrekson, 2004). In the previous year, before Osborne’s argument, Nick Clegg the Lib Dem leader had said the 50% tax rate should not be applied while numerous people were “struggling to make ends meet” (Pym, 2014). However, in the same year, Vince Cable the Business Secretary had outlined that the party would consider getting rid of the 50% rate if a good alternative became available, for example, “tax on very worthy property” Seely, 2014. In their September conference the Lib Dem activists voted, by 224 to 220, against reintroducing the 50% tax rate as a party policy (Merrick, 2014). Critics also present a different argument towards the 50% rate. In the 2012 HMRC assessment, the tax body argued that (Petson, 2014) the high tax rate makes the UK a “less desirable and less attractive place to begin, finance or fund and grow a business” (Petson, 2014). The CEO of Tax Payers Alliance, Jonathan Isaby, said that bringing reinstating the 50% rate would turn to be a “pure disaster for UK”. Additionally, Mark Littlewood, the general director at the Institute of Economic Affairs (IEA), resounded that view, arguing that it would be a “tragedy for both economic and enterprise growth” (Young & Saltiel, 2011). Also, Labour peer Lord Sugar, Apprentice show TV star and businessman, said sinking the tax was a UK’s “clever move” (Petson, 2014). Additionally, a group of business leaders have critiqued the restoration of the 50% tax rate for the high earners. These leaders warned that the high tax rate would harm UK’s economic recovery. These leaders who are the heads of 24 companies within United Kingdom identified the restoration of the 50p tax rate was a backward step that would lead to loss of jobs and stop the recovery process. In a letter addressed to the Daily Telegraph, these individuals articulated that this tax rate will affect the rate of investment in the country and that it would put the economic recovery at risk (Tadeo, 2014). This is not the initial time the issue of tax and taxation appears a great debate in the British public and politics (Davis & Henrekson, 2004). In 1979, when Margaret Thatchers resumed UK power, her government condensed the top rate of income tax to 60% from 83%. In 1998, the rate was again to 40%. Since then, the “higher rate” has persisted at the same level. However, in April 2010 Labours demand for “additional rate” was triggered, implying that anyone receiving more than £150,000 annually must pay 50% in every additional pound above the £150,000 (Financial Times, 2010). The current UK’s coalition government retained the additional tax rate system but condensed the amount to 45% from 2013 April. This has been the reason for Labour’s demand for the increase (Young & Saltiel, 2011). Should the UK government restore the 50% additional rate of income tax (Brewer & Browne, 2009)? In reference to Picks (2008), looking into the arguments, of Labor, Coalition parties, supporters and critics, it is apparent that they share a common reasoning of ‘citizen’s equality (Institute for Fiscal Studies (Great Britain) 2009). Any effort to bring tax equality and balance the government’s books must be carried out in a “rational and conscious” manner (Seely, 2014). Every taxation system, in the world community agreement, must consider who bears the heaviest tax burden (Merrick, 2014; Davis & Henrekson, 2004). Additionally, the tax body in conjunction with the government must consider the “outward” perspectives and impact that the tax rate will have for business, economic and enterprise growth and development (Young & Saltiel, 2011; Nelson, 2008). In 2011, according to BBC’S Pym (2011), twenty high-profile national economists urged the government to let go the top 50p tax rate (Prescott, 2004). The economists said that the 50% was doing a “lasting and enduring damage” to the UK’s economy. In a letter sent to the UK’s Financial Times, the economists said that the 50% should be downsized “at the earliest possible opportunity” to boost economic and enterprise growth (Pym, 2014). This argument contradicted Labour’s desire to have the rate remain as it was in the economy. Was it a debate of economists against politicians? True to Labor, the rate would (and will) help the wealthy and rich support the huge number of the middle class and poor in shouldering the tax burden (Merrick, 2014). In reference to the Institute for Fiscal Studies (Great Britain) 2009) and looking back a little, Mr. Brown, as UK’s Chancellor, was correct to keep the top rate at 40% throughout his office tenure (Young & Saltiel, 2011; Davis & Henrekson, 2004). I tend to assume that Brown did so not because he loved the rich, but because he recognized that a higher tax rate would drive a number of high earners out of the country (Prescott, 2004). Moreover, higher rates would also lead a number of companies with enormous numbers of high paid employees to find location elsewhere out of UK. Mr. Brown was both a spectacular and good pragmatist and socialist (Davis & Henrekson, 2004). He recognized that to run a prosperous enterprise economy the government needed to deal with the rich individuals and the powerful multinationals, even without liking such deals, people or companies (Merrick, 2014). Conclusion Arguably, a tax rate below 50% would raise more tax from the wealthy, the rich and the multinationals (Prescott, 2004; Davis & Henrekson, 2004). Should the UK government restore the 50% additional rate of income tax? I would say an enormous no to the question. Research shows that there is a strong behavioral response new higher tax rates, which could be bound to upset tax receipts. Numerous people saw the former top rate as too high at 40%, but most put up with the rate. I think that cannot be similar with the proposed 50% top rate (Gorodnichenko, Martinez-Vazquez, Sabirianova, 2008). The 50% may injure the growth of the economy and enterprises and the policy risks flat economic and enterprise growth if implemented (Institute for Fiscal Studies (Great Britain), 2009). References Brewer, M & Browne, J. April 2009. Can more revenue be raised by increasing income tax rates for the very rich? IFS briefing note BN84, Davis S, J & Henrekson M. May 2004, “Tax Effects on Work Activity, Industry Mix, and Shadow Economy Size: Evidence from Rich-Country Comparisons,” National Bureau of Economic Research Working Paper No. 10509. Financial Times, December 4, 2010 ‘Best tax-efficient countries revealed in indices’, London, Financial Times. Gorodnichenko, Y., Martinez-Vazquez, J., Sabirianova, S. p,. 2008. Lessons from Russia’s Tax Reform. Moscow Institute for Fiscal Studies (Great Britain). 2009. Dimensions of tax design: the Mirrlees Review.Oxford, Oxford University Press. Kavanagh, D. 2006. British politics. Oxford, Oxford Univ. Press. Merrick, J. 2014. Labour will bring back 50p income tax for top earners says Ed Balls – UK Politics - UK - The Independent. Retrieved from http://www.independent.co.uk/news/uk/politics/labour-will-bring-back-50p-income-tax-for-top-earners-says-ed-balls-9084983.html Nelson, F. 26th September 2008. Spectator, ‘Why Nigel Lawson was the most redistributive Chancellor of the Exchequer’ OECD. 2010. United Kingdom: Policies for a Sustainable Recovery Peston’s Picks, 24 November 2008, “End of Thatcher’s tax incentives”, BBC newsite –Peston’s Blog Petson, R, BBC. 2014. BBC News - Q&A: Return of the 50p top rate of income tax? Retrieved from http://www.bbc.com/news/business-25895480 Prescott, E. 2004, “Why Do Americans Work So Much More than Europeans?” National Bureau of Economic Research Working Paper No. 10316, February Pym, H. (2011, September 7). BBC News - Top 50p tax rate damages UK, say economists. Retrieved from http://www.bbc.com/news/business-14810323 Seely, A. 2014. Business & Transport Section; Income Tax: the additional 50p rate. House of Commons Library. London England. Tadeo, M. 2014, January 27. Business leaders slam Labour over 50p tax rate. The Independent [London]. Retrieved from http://www.independent.co.uk/news/business/news/business-leaders-slam-labour-over-50p-tax-rate-9087439.html Young, P & Saltiel M, 2011, “The Revenue and Growth Effects of Britain’s High Personal Taxes”, London. Adam Smith Research Trust (ASL) Ltd. http://www.adamsmith.org/sites/default/files/resources/high-personal-taxes.pdf Read More