Restoring the 50 Percent Additional Income Tax Rate in the UK - Literature review Example

RESTORING THE 50% ADDITIONAL INCOME TAX RATE IN UK Introduction Hettich and Winer (2005) defined taxation as a means in which the governments normally finance their expenditure by inflicting charges on corporate entities and the citizens. Governments normally use the taxation system to discourage or encourage various economic decisions. For example, the government may reduce taxation on household income by the money paid as interest on the home mortgage loans hence resulting in more construction activities and therefore generating more job openings for individuals in the countries. The government uses taxation to discourage certain behaviors that could harm individuals in the society like excessive smoking and alcohol drinking by increasing the taxes on such commodities. There are different forms of taxes, which include income tax, estate tax, and gift taxes. Lang et al. (2006) defined income tax as the charges imposed on business entities or individuals by the government that vary with their amount of incomes or profits. Individuals in partnerships are not taxed but the partners are instead taxed on their own shares of partnership items. To compute income tax, one needs to get the product of the tax rate multiplied by the taxable income (Adema, 2009). Those citizens and businesses that fail to pay taxes are punishable by law and therefore all individuals are entitled to pay so long as they are earning an income. Lang et al. (2006) noted that in the UK, tax payment involves two levels of the government that is the central and local government. In the central government, the revenues come from national insurance contributions, income tax, value added tax, fuel duty and corporation tax. The local government revenues are from business rates in Wales and England, grants from the central government finances, council tax and fees from on street parking. This paper is going to discuss if the UK government should restore the 50% additional rate of income tax. The paper will provide a detailed explanation of the recent history of the additional rate of the income tax and then discuss arguments in favor of and against the restored rate of 50%. History of the 50% additional income tax rate Residents in the UK normally pay their taxes depending with their taxable incomes that are above their personal allowances within the year. Miller and Oats (2011) noted that the present tax year is from 6 April 2014 to 5 April 2015. Most citizens in the UK pay a personal allowance of 10,000 pounds unless they were born before April 6, 1948 or their incomes are above 100,000 pounds. Campbell (2011) stated that the 50% additional rate of income tax is a charge that was paid by citizens in the society who were earning incomes above 150,000 pounds. In the year 2009, Alistair Darling the then Chancellor publicized in his budget that there would numerous increases in tax that were meant to raise more than 6 billion pounds by the year 2012. The purpose for raising these taxes was to ensure that the economic future of the UK was protected and the citizens who were poor, middle, and low-income earners would be provided help when they needed it most. Great Britain (2010) noted that the changes in the budget consisted of increases in the indirect tax rates for commodities such as alcohol and road fuel for that tax year and other changes in income taxes would be from April 2010 that included the new 50% additional income tax rate for those citizens earning above 150,000 pounds. The new 50% income tax rate brought about mixed responses to the read budget as many citizens felt that it was a strange approach for the labour government to aim at taxing the wealthy in the society. Many individuals wondered if these changes would raise the amount of revenues the government had anticipated. The government hoped that 1.3 billion pounds that had been achieved in 2010-2011 would rise to 3.05 billion pounds in 2011-2012. Schanz and Schanz (2011) noted that the HM Revenue and Customs (HMRC) estimated that only 236,000 citizens paid the 50% additional income tax rate out of the 31.3 million of the total taxpayer populace. The 50% additional income rate was never mentioned the concord underpinning the federation by the new Conservative-Liberal Democrat Government although they had publicized that the personal allowances of citizens would be raised in the impending budget. This would be done in order to help middle and low-income earners as the first initiative each year toward laying down the allowance to 10,000 pounds (Lymer and Oats, 2013). During the Chancellor George Osborne’s budget speech on 22 June 2010, it was verified that the personal allowances would increase by 1,000 pounds to 7,475 pounds from April 2011 and the 50% additional tax rate would remain in place. During the second budget speech on 23 March 2011, the Chancellor had still not made any changes to the various rates of income taxes for the next year but explained his concerns about the 50% additional tax rate. This is because he felt that the policy would facilitate a lasting dent to the economy in the UK if it were made a permanent practice. The Chancellor suggested that HM Revenue and Customs to review the policy and find out how much revenue the 50% additional tax rate raises (Salanie, 2011). The details of the new income tax structure in the Budget between 2010 and 2011 were as follows (Salanie, 2011): 2010-2011 The three tax rates comprised of tax for dividends that included the dividends that were otherwise taxable at 20% basic rates that would continue to be taxed at 10% ordinary dividend rates while dividends that were otherwise taxable at 40% higher rate would continue being taxed at 32.5% upper rate per dividend. The dividends that were otherwise taxable at the new 50% additional income tax rate would be taxed at a new 42.5% additional rate income. Lymer and Oats (2013) noted that the dividend trust rates would be increased from 32.5% to 42.5% while the trust rate would be raised from 40% to 50%. 2009-2010 Two major income tax rates included the 20% basic income rate tax that applied to taxable incomes that added up to 37,400 pounds and the 40% higher tax rate that applied to taxable incomes above 37,400 pounds. As from April 2010, 50% additional income tax rate would be applied to taxable incomes above 150,000 pounds. Lymer and Oats (2013) stated that it had been estimated that the 50% additional tax rate on those earning 150,000 pounds would contribute 2.5 billion pounds by 2011-2012 and that the withdrawal of personal allowances from citizens with 100,000 pounds incomes would contribute 1.4 billion pounds by the same period. Daniel et al. (2010) noted that during the 2010 budget the estimates had been revised to 3.1 billion pounds and 1.47 billion pounds respectively. Lymer and Oats (2013) stated that during the 21 March 2012 budget, Chancellor Osborne publicized that the department of HM Revenue and Customs had found proof of substantial forestalling whereby the taxpayers were shifting their incomes into the preceding tax year. They did this so that they avoid being charged the 50% additional tax rate at the expense of the taxpayer of 1 billion pounds. Chancellor Osborne argued that justifying the 50% tax rate would be devastating the economy since the policy contributes very little revenues to the society. The reaction of the Chancellor led to the 50% additional tax rate being cut to 45% from April 2013. Lymer and Oats (2013) noted that the department that dealt with 50% rate commenced working on a detailed report that approximated that the cost of cutting the tax rate to 45% would be 100 million pounds only by 2014-2015 considering the awaited response of the taxpayers to the change. The Chancellor’s declaration was quite controversial but the government executed the 45% additional rate change as it was proposed, which is the case to date. Ed Balls the shadow chancellor announced that when elected, he would guarantee that the labour government restores the 50% additional income tax rate during the latest campaigns in UK in January 2014. According to Ed ball the 50%, tax rate system would donate a meaningful amount of money to assist in the reduction of the budget deficit and hence enhancing a reasonable tax arrangement. Ed ball was positive that restoring the 50% tax rate would restore the economic credibility in the UK that is now dented. The shadow chancellor argued that by taxing 50% on the wealthy individuals who earned more than 150,000 pounds this in three years would lead to a raise of 10 billion pounds. Feedbacks to the new 50% additional income tax rate Schanz and Schanz (2011) noted that restoring the 50% additional income tax rate would promote both negative and positive responses from the community members. Reasons for the idea Ed Balls the shadow chancellor insists to restore the 50% additional income tax rate because he believes that the policy will help to minimize the budget deficits in the UK government and enhance the use of improved tax systems. The shadow chancellor believes that those with broader shoulders, who are the rich need to bear more burdens than the poor are in the society. Ed balls pointed out that the HMRC figures corroborated that the citizens who were earning 150,000 pounds and above had paid more than 9.5 billion pounds in form of taxes during the application of the 50% additional tax rate in three years than what the government had estimated. Salanie (2011) argued that increasing taxes for the wealthy in the society would help the government to raise more revenues and hence securing the economic future of the country and support the poor and low-income earners when they need assistance. The Unions in the UK support the idea as they claim that restoring the 50% tax rate is a sign that the labour government comprehends the need for a better tax system for the UK in the future. Feedbacks against the idea Miller and Oats (2011) stated that Liberal Democrats and conservatives argued that the idea of restoring the 50% additional income tax rate would be risky for the recovering economy and restoring it would a national catastrophe. Simon walker the director general of the Institute of Directors stated that the 50% tax rate would destroy the Labour’s integrity in the eyes of the various business communities in the UK. According to the Institute for Fiscal Studies, the tax system is self-defeating since it failed to raise adequate finances to pay for itself. Campbell (2011) stated that according to the HMRC analysis, the underlying yield of the 50% tax rate was much lower than what was originally predicted. Mark Littlewood, the director general of the Institute of Economic Affairs shared his concerns by stating that reintroducing the 50% tax rate would be disastrous for both enterprise and the general economic growth. He observed that those individuals who earn more than 150,000 pounds always pay approximately 30% of all the income tax. The rich need to be nurtured because they create employment for individuals in the country. Adema (2009) noted that after the Chancellor announcement of the new 50% tax rate there were many responses from the citizens because it focused on only 1% of the individuals in the society. The people felt that the change approach used by the Labour government would lead to minimized revenues other than advancing the economy. Restoring the 50%, tax will chase away persons with unique talents and discourage people from other countries from investing in the UK because their efforts would not be profitable. The increase in the tax rate would discourage the rich from living in the UK and hence some of them may evade tax by shifting to other locations with fairer tax systems. Conclusion Income tax is the charge that is normally imposed on individuals and corporations by the government. The new 50% additional tax rate is a charge that was imposed on the rich people in the society that earned more than 150,000 pounds. The new tax system had been introduced in the past to assist the middle and low-income earners and to protect the economic future of the UK that was failing. The Conservatives, Liberal democrats and majority of the citizens were against the idea of restoring the 50% tax rate because it targeted only a small percentage of the rich and felt that it would lead to economic loss and hence the country becoming a national disaster. According to the discussions in the paper, it is clear that restoring the 50% additional rate of income tax would do more harm than good since the disadvantages are more than the advantages. References Adema, R. (2009). UCITS and taxation towards harmonization of the taxation of UCITS. Austin, Wolters Kluwer Law & Business. Campbell, D. (2011). International taxation of low--tax transactions: high--tax and low—tax jurisdictions. New York, NY, Juris Publishing, Inc. Daniel, P., Keen, M., and Mcpherson, C. P. (2010). The taxation of petroleum and minerals: principles, problems and practice. London, Routledge/International Monetary Fund. Great Britain. (2010). Taxation (International and Other Provisions) Act 2010: Chapter 8. [London], Stationery Office. Hettich, W., and Winer, S. L. (2005). Democratic choice and taxation: a theoretical and empirical analysis. Cambridge, Cambridge University Press. Lang, M., Schuch, J., and Staringer, C. (2006). ECJ: recent developments in direct taxation. Wien, Linde. Lymer, A., and Oats, L. (2013). Taxation: policy and practice. Birmingham, Fiscal Publications. Miller, A., and Oats, L. (2011). Principles of international taxation. Haywards Heath, Bloomsbury Professional. Salanié, B. (2011). The economics of taxation. Cambridge, MA, MIT Press. Schanz, D., and Schanz, S. (2011). Business taxation and financial decisions. Heidelberg, Springer. Read More