Should the United Kingdom Government Restore the 50% Additional Rate of Income Tax - Term Paper Example

Should the UK government restore the 50% additional rate of income tax By Key words: Income Tax Taxation History When the regime of 1979 came into power, the government of Margaret Thatcher reduced the income tax rate from 83 per cent to 60 per cent. This was later reduced in 1988 to 40 per cent and the higher rate has remained at similar level since then. In 2010 April, the additional rate of Labour came into existent, meaning that anyone that earns more than 150000 pounds annual had to pay 50 per cent for every pound of income above the same amount Midwinter( 1993). The current coalition government kept the additional system, but later reduced the figure to 45 per cent from last April. In the United Kingdom, the income tax rate is about 22%/. This is the rate that majority of the citizens will pay. It is worth nothing that this is termed as the marginal tax rate and will only be paid on incomes the respective tax threshold. In the United Kingdom, the threshold for tax is 5575 pounds for 07-80. Therefore, if a person earns 6225 pounds, the tax payer will be required to pay at22% which is equivalent to 1000 pounds of earning. Therefore, if a person is paid 6225 pounds, he is required to pay 100 pounds as tax. It is noted that 10% of income tax rate for income between 5226 and 7455 pounds. This was removed during the budget of 2007 as the main cut fundamental rate from 24 per cent to 22 per cent. The history of income tax first appeared in 1799. It was introduced by William Pitt: he was the younger to pay the Napoleonic wars that were initially 2d in the incomes pound over 60 pounds. Recently, in the mid of 1980s, the fundamental rate reached an income rate of 33 per cent. The United Kingdom has a marginal tax rate system. Meaning that the income tax is charged on income that is above certain levels. Therefore, it means that if a person earns 200000 pounds, the tax payer is required to pay half of the whole 200000 pounds. A tax payer is expected to pay half on the income earned above 150000 after including the personal allowance. The income tax rate in 2009 and 2010 is as shown below: Personal tax allowance-6475 pounds Basic rate-20% -0-37400 pounds Higher Rate-40%- over 37400 pounds and 150000 pounds 50 per cent Top Rate- 50% over 150000 pounds Historically, the Income Tax Allowances is as shown below Income tax: taxable bands and rates for previous years Tax year 2013/2014 Taxable income Rate of tax 0 - £2,790 10 per cent (starting rate for savings only) 0 - £32,010 20 per cent (basic rate) £32,011 - £150,000 40 per cent (higher rate) Over £150,000 45 per cent (additional rate) Tax year 2012/2013 Taxable income Rate of tax 0 - £2,710 10 per cent (starting rate for savings only) 0 - £34,370 20 per cent (basic rate) £34,371 - £150,000 40 per cent (higher rate) Over £150,000 50 per cent (additional rate) Tax year 2011/2012 Taxable income Rate of tax 0 - £2,560 10 per cent (starting rate for savings only) 0 - £35,000 20 per cent (basic rate) £35,001 - £150,000 40 per cent (higher rate) Over £150,000 50 per cent (additional rate) Tax year 2010/2011 Taxable income Rate of tax 0 - £2,440 10 per cent (starting rate for savings only) 0 - £37,400 20 per cent (basic rate) £37,401 - £150,000 40 per cent (higher rate) Over £150,000 50 per cent (additional rate) Source: http://www.adviceguide.org.uk/wales/tax_w/tax_income_tax_-_how_much_should_you_pay_e/income_tax_rates.htm#h_income_tax_taxable_bands_and_rates_for_previous_years Income Tax Rates United Kingdom Starting Rate for Savings 10% 0-2440 pounds Basic Rate 22% 0-37400 pounds Higher Rate 40% over 37400 Top Rate 50% over 150000 pounds Discussion The labour government of the previous regime increased the income tax rate from 40 per cent to 50 percent in the year 2010. The current UK government reduced that amount to 45 per cent starting April last year. The discussion formed the main focus in the pioneering election. Any person that receives a taxable income like pensions, interest on savings, and salaries in United Kingdom is subjected to income tax. After a personal allowance worth 9440 pounds that was due to increase to 10000 pounds from the effect of the tax rate. Currently, a person receiving an income of 32010 pounds will be taxed at the basic rate of 20 per cent while the higher rate is applicable to incomes from 32011 pounds to 150000 pounds. The plan of labour, fifty per cent of the income above 150000 pounds is channeled to customs and HM Revenue rather than the present 45 per cent. The effect gives the wealthiest people in the nation a massive tax cut by shedding the 50 per cent rate, something that is not right. Restoring the 50 per cent rate, will give those with the broadest shoulders to bear a just burden share. Based on the 2012 HMRC assessment, when the income tax rate is cut from 50 per cent to 45 per cent, it will cost the government an amount equal to 100 million annually. In the three years that the tax was imposed (increasing the income rate from 40 per cent to 50 per cent) raised the cost by 10 billion pounds more than what the assessment suggested. The effect of restoring the rate to 50% would be higher than 100 million pounds since the tax liabilities for citizens that warn more than 150000 pounds in the period during the assessment was conducted was higher compared to the previous thought. The 50 per cent rate would rise a little if anything. Scrapping the 50 per cent rate in their 2012 budget, would damage the economy and then rise next to nothing. 50 per cent should not be decreased while a lot of people struggled to survive. Scrapping the 50 per cent is only perfect if there is a good alternative like the taxes on high value property. Restoring the 50 per cent rate shows that the labour government understand the fairer taxation system requirements. People will now understand that the labour is coming up as a positive alternative for the country. The 50 per cent tax rate could be undermined by a shorter period that remained in place. The United Kingdom has always been seen to have a massive rise in inequality and the 50 per cent rate would assist in balancing up the economy. The labour government needs to restore the 50% additional income tax rate since it is a perfect response to recession. The additional tax rate is deemed to deliver a strong economy because the approach is based on the desire for national prosperity and renewal. Therefore, it is an ideological preposition towards the reduction of the size of state. The plan is good since the wealthy will be able to contribute in future tax and re-iterates his support for the party for the mansion tax in properties that are more than 2 million pounds, but he said the party ruled out the increasing the top tax rate. According to 2012 HMRC assessment, the high tax rate made the United Kingdom a less attractive place to grow, start, and finance the business. Bringing back the 50 per cent would seem as an unmitigated disaster for the United Kingdom. According to the Institute of Economic Affairs restoring the 50 per cent income rate is a disaster for both the economic growth and enterprise. According to evidence gathered from a number of countries such as US, France, India, Canada, the UK, Hong Kong and Russia, the high tax rate will not be able to yield public revenue and will have an effect of damaging the economy since tax payers are mostly wealth creators and do not like paying additional taxes (Yoder 2012). Calculations by the HMRC regarding the policy predict that the UK risks a flat growth for a period of ten years and the possibility of recession is heightened at the end of the decade. This will have a negative effect on the net government finances and the harm is going to proceed and getter worse as the years go by. It is projected that after ten years, the UK is going to incur public debt amounting to around £ 350billion which is the same as a fifth of tax receipts without the 50p tax rate that is expected by the tear 2020. The finance industry contributes immensely to the UK economy evidenced by the fact that the industry in 2009 employed a million people, provided tax receipts worth £ 66 million ,was responsible for contributing a surplus of £ 40 billion and its contribution to the GDP was close to 10p.Unlike other sectors of the economy, it is mobile. However, with the current tax rate, a survey conducted by YouGov for Policy Exchange reported that of the financial service professionals surveyed, about 43% of them had considered or were currently considering leaving the UK and around a quarter of that group, had already departed while others were making plans to leave the country. The tax rate caused a dip in public revenues. Research by HMRC which was completed in 2010, approximated that around 20p of the largest companies were considering emigrating from the UK and relocating overseas to countries that had a better tax policy. As of 2010, more than twenty large companies had already moved their operations abroad due to tax reasons. The companies include among others, Kraft Foods, PepsiCo, McDonalds (European headquarters), Cadbury and Shell. Mulberry, which is a leather wear company, announced that the primary reason why its board had decided not to open another factory in Britain was because of the punitive tax rates. The 50p tax rate policy was even responsible for ruining other sectors of the economy including the sorts industry in Britain. The National Bureau of Economic Research issued a paper that showed correlation between the migration of top footballers and taxation. This was achieved by combining evidence of tax reforms from 14 other countries and a link between location decisions by players and tax rates. For example, when the star player Cristiano Ronaldo emigrated from Britain in 2009 and went to Spain, he cited that the 50p tax rate levied in England had contributed to his decision to immigrate. A study conducted by a foreign broker in 2010 for Currency UK revealed that close to 75% of the British population had considered being expatriates due to the poor state of the economy coupled with the deficiency in employment opportunities. This can be attributed to the high tax rate. Many of them had relocated to Australia and Canada. An additional study was carried out by NatWest and it was revealed that close to 90p of the expatriates revealed that their quality of life had improved since immigrating ,earned more wages and their living conditions were far much better than in Britain. Averagely, the wages of professionals and managers who decided to work abroad was calculated to be £ 20,000 higher compared to if they had remained in Britain. The 50p tax rate is an incentive to work less or even stop working especially for those people that have accumulated enough wealth that can sustain them. The incentive to work has been reduced coupled with the leisure times’ opportunity cost while those that need to work have decentivized to put extra effort in their duties (Engel 1999). Conclusion From the various research conducted, it is clear that the 50 p tax rate is a deterrent especially to high earners who result to minimizing their tax liability. If the coalition adopts the 50p plus marginal tax rate, then it should be prepared to deal with the backlash and cases of tax avoidance (Prest 1970). From the studies conducted it is clear that a 50p tax policy is going to end in disaster by causing public revenue deficits and a reduction in the growth levels of the country in the long run. The government should not restore the 50p marginal tax rate policy. References Engel, Eduardo M. R. A., and James R. Hines. Understanding Tax Evasion Dynamics .Cambridge, MA: National Bureau of Economic Research, 1999. Print. Midwinter, Arthur F., and Claire Monaghan. From Rates to the Poll Tax: Local Government Finance in the Thatcher Era. Edinburgh: Edinburgh UP, 1993. Print. Prest, A. R. Social Benefits and Tax Rates: A Short Study of Implicit and Explicit Marginal Tax Rates in England and Wales, London: Institute of Economic Affairs, 1970. Print. Yoder, Timothy R., and Brian P. Mcallister. "Do Private Foundations Increase Current Distributions to Qualify for a 50 Percent Tax Rate Reduction?" The Journal of the American Taxation Association (2012):120206090243001. Print. Read More