History of Taxation in Britain - Research Paper Example

History of Taxation in Britain It was Britain which initiated Industrial Revolution, the revolution itself revolutionized the economic activities and military conquests of the country. From 1939 onwards, there has been substantial growth in the size of government. It is reported that the real level of government spending has increased by more than five times. Since 1938, the real level of GDP has grown by a factor of somewhat less than five; the disparity is because there is variation in the real level of spending, and the growth of the whole economy and the change in the role of government within that economy. The twentieth century started with high spending, which was based on war spending. The First and Second World Wars both lead to very large increases in public spending and rather smaller increases in tax. The Korean War is reported to have discernible effect, but neither the Falklands (1982) nor the Gulf (1991) conflict seems to have had an impact on spending. The need for more revenue during the war led to increases in tax rates, increases in the coverage of existing taxes and the introduction of wholly new taxes. Perhaps the most dramatic change was to income tax. Prior to the war, income tax had never been a mass tax. It was first introduced in 1799, and was permanently in place from 1842, but there were still fewer than 4 million taxpayers in 1938. By the end of the war, the number of taxpaying families had increased to over 12 million, an increase which was sustained into the following decades. The two marked periods of growth in the last quarter of the century, in the early 1980s and the late 1980s / early 1990s; both the period experienced turmoil in the economic activities of the country, which led both to shrinking GDP and to higher cyclical government spending as unemployment increased gradually. The substantial reductions in the real level of public spending was due to the decline in the economic activities during 1970’s, however the economic activities practiced restraints in the coming years till early 1990’s. INTRODUCTION According to reports, during the period of 2000, United Kingdom’s official government spending was calculated to be £360 billion, and the government revenues were gathered at £370 billion. The figures are can interpreted as, for each UK household the government allocated £14,000 and £15,000, the amount is equivalent to the post-tax income a childless couple would need to be in the middle of the income distribution, or the amount required by the retired UK national. Local taxes have been important type of revenue for UK economy, it accounted for one third of total revenues, however is importance declined after World War I and II, . ‘In the early twentieth century, these accounted for up to a third of total revenues, but their importance declined as the taxes required to pay for both World Wars were raised at the national level’, (A. Dilnot and C. Emmerson, ‘The economic environment’, in A. H. Halsey with J. Webb, Twentieth Century British Social Trends, Macmillan, Basingstoke, 2000). Revising the British history of tax returns, local taxes, (chiefly a property tax called ‘rates’, which had both business and household components) were estimated to be seven percent of GGR. However after 1960, the local taxes represented more than 10 percent of GGR, and have remained consistent through out. However from 2000 onwards, local taxes have again become much less significant, representing only between 3 and 4 per cent of revenues in the last decade of the twentieth century. The study concluded that, ‘This is because the council tax, like its predecessor the community charge (popularly known as the poll tax), raises less revenue than did domestic rates (which were abolished in 1990), and also because in 1991 non-domestic rates became a central government tax, the revenue from which is redistributed to local authorities’. Furthermore, ‘In contrast to the current UK position, in federal countries such as the USA and Germany, around a third of government revenues can be collected through local- and state-government taxes. Even amongst unitary states, the UK state has come to fund an unusually low proportion of its activities through local taxes’, (OECD, Revenue Statistics, 1965–1999, Paris, 2000). TAXES: SOCIAL SECURITY AND PENSIONERS Personal taxes have accounted for only quarter of total tax revenue, much because of the focus of popular and political attention during the period. Taking the previous accounts into report, ‘ In 1973, the system was overhauled, integrating the surtax on high incomes, which dated back to 1911, into the main income tax and simplifying the operation of the rate structure. (Prior to the reform, for example, the basic rate of tax was 38.75 per cent but with earned income relief of two-ninths, making a tax rate of 30.14 per cent; in 1973, the basic rate was set at 30 per cent.) But during the 1973 reform, the very top rate of income tax on earnings was left at 75 per cent. In 1974, the top rate on earnings was actually increased, to 83 per cent’ (A. Dilnot and C. Emmerson, ‘The economic environment’, in A. H. Halsey with J. Webb, Twentieth Century British Social Trends, Macmillan, Basingstoke, 2000). The very increasing tax cuts was not appreciated because it was believed that it was thought that the rising tax cuts will have possible disincentive effects of taxation, though it hardly had impact on any of the segment of society, particularly the pensioners, even though it was believed that the tax cuts will generate theoretical impact on labor supply. Of course this will generate an unprecedented impact on the pensioners, and their welfare scheme, the possible deduction in the labor scheme will have consequential interpretation in the coming years. Lower labor supply, either implies that labor will be imported, or services will be exported in places where labor is cheap, or the local labor is expensive that requires further investment of funds towards pensioner schemes. The top rate on earnings was cut to 60 per cent in 1979 and then 40 per cent in 1988, while the basic rate also fell, from 35 per cent in 1977 to 22 per cent in 2000. Partly to offset the costs of these reductions, a range of allowances, such as mortgage tax relief, life assurance premium relief and the married couple’s allowance, have been removed. In addition, the numbers of higher-rate taxpayers increased in the last two decades of the twentieth century, as the thresholds between bands were generally indexed only in line with prices (which tend to go up more slowly than incomes). Together these changes help to explain and signify that in spite of the cuts in headline tax rates, the relative importance of income and capital taxes in the total was maintained over the 1980s. The most substantial growth in spending share is found to be in social security. Social security spending merely involves the government redistributing money between people, rather than deciding what it should ultimately be spent on. As such, one might expect that the former would have very different economic effects from the latter and that it could more easily receive public approval. In fact, however, the steepest rise in social security spending coincided with the cessation of growth in state spending in the economy overall. The relative stability of social security spending since the early 1980s reflects rather tight control of benefit rates, which have mostly reduced relative to earnings since 1979. But the move away from contributory benefits to those tested on incomes has also played a part. It has been observed that, the changing relative importance of the two main types of benefit since 1948. The first class National Insurance benefits are conditional on the claimant having made contributions out of earnings in the past, but entitlement is not reduced if claimants have independent income or wealth. They are paid when the claimant stops working, for example, the state pension in the case of retirement. The second class social assistance benefits have no link to past contributions and are made dependent on need, which, depending on the benefit, is assessed by income, family size or health. SECURING FUNDS FOR PENSIONERS It is interesting to observe that with the passage of time the population of the United Kingdom is reducing, the government is working hard to incorporate the required number of immigrants into the national territory to generate revenues, and reduce the spending of foreign exchange. The reduction in the working population will have undesirable impact on the growth of national economy, therefore the government of United Kingdom has to encourage the involvement of the local industries and service sector to support and encourage the involvement of the local population into services and economy, instead of relying on cheap labor of India, China and South east Asian countries. For this purpose the government has to definitely offer reduction of taxes in the earning and profits of the company and that particular reduction can be later secured from tax reduction of the employees, however at small margin. It has to be realized that United Kingdom is no longer in the preferred list of leading investment country, and this has motivated the local and international investment companies to practice reluctance in investing their resources and manpower in this country. The government can definitely not motivate the public sector to create job avenues, because that will add further to the expanses of the government economy, therefore it is more important to allow the participation of international companies into local economy, by exploring the new avenues of investment, and in this regard the local population’s involvement has to be ensured, if not definitely then at least certain proportion of employment opportunities should be reserved for the local population. It has to be understood that the major source of United Kingdom’s stable economy is consistent enrolment of the international students into UK universities. It has to be understood that if these international students are hired or preferred for employment, this can be beneficial for the government. The government of United Kingdom has no legal obligation towards the foreign population in the country except for ensuring security and protection of their interests, religion and cultural practices. However the government has certain right over their income, in this manner the government can certainly generate money from their income in exchange, it is fair bargain, and the government does not have to employ heavy funds for the welfare of the international population. Such a policy will certainly have long-term impact as well. The numbers of pensioners are expected to reduce in the coming years, and therefore the government can manage enough funds. However to ensure this, it s important for the government to implement fluctuating immigration policy, and instead of offering immigration on annual basis, it should be offered after thorough study of the after retirement expenses that the government has to bear after the international population share local status. MEASURES for securing funds for the pensioners The number of increasing population into the state should be controlled, and well calculated. The government has following options, 1. The government of United Kingdom should encourage the participation and involvement of international community on conditional basis, considering the examples of Gulf States; the countries like Qatar, Saudi Arabia, Kuwait, Jordan, Bahrain and United Arab Emirates and Ireland, such countries do not offer immigration to their international labor, or it can be said that immigration is offered on conditional grounds after thorough review of their applications and provided that their citizen ship can offer rewards for the national economy. However at the same, these governments have imposed certain level of tax cuts into their respective earnings, and it is surprisingly to observe tat the tax cuts imposed on the incomes of the international labor is more than the tax cuts applied on the income on the local population. 2. The government should encourage the role of the international labor in controlled manner, and should further state it clearly that the government is under no legal obligation to supply for their health care and education needs. The government, in this manner, can safe good amount of money in the national exchequer. 3. The government should encourage the local and international investor to apply certain quota for the local population during recruitment process, and the rights of local population should be protected. In this manner, the government can secure tax cuts, and improve the local employment figures. 4. The government should increase the number of immigrations, much because the government needs to increase its local population as well, presently the birth control rate of the United Kingdom is lowest in the region and therefore it is important for the government to ensure that the number of population rises in the coming years. In this regard, the government has to compromise over the savings. 5. It is important for the government to realize that it has to respect the involvement of international labor into national development efforts, and therefore the labor is expected to fight for their rights if they are found being discriminated, therefore the government is encouraged to make possible avail of the local population, and then request for the participation of the international labor force. EFFICIENCY OF BRITISH TAXATION SYSTEM It has to be understood that the British economy is reflected by its instigators involved into financial management, and it is not mainly due to the deliberate reactions of others which influence the economic policies and funds distribution, the actions of the other factors can be controlled and has been successfully handled. It is therefore important to realize that the economy of United Kingdom does appears to be in adherence and in conformity with the close legal federation of gigantic size within which compulsory methods are applied for ensuring uniform financial and economic policy. The policy should focus more on funds collection; however the distribution phase can be monitored once the availability of the funds can be ensured. According to the manifestation of the country’s economic advisory, ‘it is rightness of principle, justice of application, and clarity of exposition of all policies which will, in future, hold together the national forces having educated electorates and leadership, and not old-fashioned constitutions, rules or obligations, all of which can and will be discarded if they prove irksome, and none of which can be enforced, under present day conditions, except within the realm of a complete and tyrannous regime’(Lady Rhys Williams; Taxation and Incentive, Oxford University Press). The economic commission of the United Kingdom has agreed upon all forms of financial and economic polices, ensuring protection of the interests of the pensioners, and in this regard certain policies have been implemented, and some are under consideration. Taxation is the chief instrument by which the policy is carried out, and there is need for implementation of legal machinery to enforce agreement and for complete uniformity in its application. The British economic policies have never been under the subject of criticism much because it has incorporated the efforts of the local population, and in this respect the economic incentives and tax cuts to the local population has been offered in consistent and rising manner. However the government needs to apply and adjust the role and influence of the foreign community in manner such that the economic rights of the local population are protected. REFERENCES 1. T. Clark, M. Elsby and S. Love, Twenty-Five Years of Falling Investment? Trends in Capital Spending on Public Services, IFS Briefing Note no. 20, 2001, 2. T. Clark and A. Dilnot, Measuring UK Fiscal Stance since the Second World War, IFS Briefing Note no. 26, 2002 3. National Statistics, Annual Abstract of Statistics 2000, London, 2000, p. 28 4. OECD, Revenue Statistics, 1965–1999, Paris, 2000 5. Dilnot and C. Emmerson, ‘The economic environment’, in A. H. Halsey with J. Webb, Twentieth Century British Social Trends, Macmillan, Basingstoke, 2000. 6. Lady Rhys-Williams; Taxation and Incentive, Oxford University Press. Read More