UK National Debt - Assignment Example

a) Explain with examples from recent years in the UK, the main reasons why a government taxes its citizens. Taxes have always been levied on citizens; however, each and every government tax its citizens for various reasons. The reasons why the UK government taxes its citizens are; To raise money for government spending; the UK government is responsible for the provision of public services like education, healthcare, internal and external security and state welfare. In healthcare, the government of UK provides public healthcare through the National Health Service NHS. The health care services are available only to the permanent residents of the UK. The health care services are given to the residents for free but paid for by taxes that the government collects from its citizens. However, the healthcare system in the UK is devolved into healthcare services for England, Northern Ireland, Scotland and Wales. Another example of what the government uses the tax for is pension. The governments of UK through the National Insurance provide income for their citizens when they retire. The pie chart below shows the governments expenditure in the year 2013. The total spending for the financial year was £675.1 billion. Pension accounted for 21 percent which amounted to £139.1 billion, welfare at 17 percent and £116.6 billion, Defense £42.2, education 13 percent at £87.3 billion and healthcare at 18 percent and £124.4 billion (ukpublicspending.co.uk, 2013). Income redistribution is another reason why the government levies taxes on its citizens. The government does this by taxing those who earn higher than those who earn less. Those who earn less also get government incentives. In redistribution, the government of UK has increased the tax burden of those earning more and lessened the poorer citizens’ tax burden through the National Minimum Wage, Working Families Tax credit and the New deal. Under the National Minimum Wage, the minimum hourly pay is set, and it entitles all workers in the UK to the set minimum pay per hour of work. In the UK, the minimum wage has risen over the years to reach £6.5 in 2014. The minimum wage, however, varies depending on the age of workers. Workers aged 21 or more are entitled to £6.31 per hour in 2013, those aged 18 to 20 £5.03 per hour, those under 18 £3.72 awhile those under 19 are entitled to £3.72 per hour. The minimum wage requirement does not cover self employed people and children who are of compulsory school going age. The minimum wage was, however, increased in 2014 to be at £6.50 for the highest payout per hour of work (GOV. UK, 2014). Under the Working Families Tax Credit, citizens of the UK are entitled to tax credits if they have attained a minimum age of 16, work certain number of hours in a week and have an income £1,940 per annum. The incentives also depend on and individuals circumstances and income. For example if you are a couple and have applied for the tax credit jointly, you can get up to £1,990 per year, if you are a single parent your tax credit can be up to £1,990 per annum and if you work at least 30 hours a week you can be entitled to a tax credit of up to £800 per annum whereas if you have a disability, the UK government can give you up to £2,935 tax credit in a year. Those with severe disability get an additional £1,255 per year. Those who pay for childcare also get tax credits of £122.5 for one child and £210 if paying childcare for two children. The tax credits in the UK are normally paid directly into the recipients account either weekly or monthly (GOV.UK, 2014). The government also levies taxes on its citizens because it needs to pay government debt. Government borrows money to finance some of its operations. Sometimes the amount of tax collected is not enough to take care of government expenditure (Pettinger, 2014). This results into a deficit which forces the government to borrow money through the issuing of securities, government bonds and bills. The interest on these bills and bonds are paid using tax collected from the citizens of UK. The bills and bonds enable the government to pay for its expenditure while the interest on the bills and bonds are paid once the government collects taxes from the people. (Source: mail online). The graph shows the country’s debt over the years up to 2012. The chart below further shows how the government pays for its debt interests. These interests are paid using taxes collected from the people of UK. b) Under the 1975 labour government, the basic rate of personal income tax was 35%, and the top rate was 83%, with the main rate of corporation tax standing at 52%. As of April 6th, 2014, the equivalent rates will be 20% and 45% for personal income tax and 21% for corporation tax. Evaluate the economic effects of a cut in direct taxes for both individuals and firms in the UK. Consider both benefits and costs. The taxation system in the UK has been undergoing changes from the late 70’s. The effects of these tax policies affect people both positively and negatively. The graph shows how tax credit has changed over the last ten years in the UK. In 2014, the changes in tax reached a level where they will affect more than 26 million people living in the UK. As a result of the governments’ tax policy changes, personal tax allowance has been raised to just under 10,000. Workers in the UK will only begin to pay tax once their income exceeds £9,440. The allowance is even higher for people aged over 65; at £10,500. The new tax policy in the UK means that the people living and working in the country pay less tax. This move is seen as one of the governments’ long term economic plans to help people keep more of their hard earned money making them more financially secure. Some other issues included in the governments plan for long term economic growth include; reducing the budget deficit, job creation, cutting income taxes, reducing immigration, capping welfare and improving the quality of education in the UK. As a result of the tax policy change, those working on the national minimum wage specifically workers who work for less than 30 hours a week are exempted from paying income tax. Those who work part time will also be able to keep a larger portion of their income making it easy to support their families (GOV.UK, 2014). The benefits of tax cuts are not limited to the mainland, the people of Northern Ireland are also set to gain from these tax cuts. In Northern Ireland, it is estimated that the tax cuts will put more money in the pockets of 676,000 people. The table below shows the national statistics of the number of people who will benefit from the new tax cuts. Total number of people benefitting 26,000,000 Total number of people who pay no income tax 3,020,000 Total taken out of income tax on 6 April 2014 255,000 Source: HM Treasury The tax cut will also affect people who pay tax at 40 percent. Their tax liability will reduce from 34,370 to 32,10 leading to a tax saving of over 2,000 pounds. The changes will also affect the people who earn more than 150,000 pounds who were previously taxed at a rate of 50 percent. Their income will now be taxed at 45 percent. At the beginning of the new financial year, the basic state pension is also expected to rise by 2.5 percent. The other tax policy introduced in 2014 that will affect individuals is the bedroom tax. The bedroom tax applies to people of working age who claim housing benefits. The new bedroom tax restricts benefits claim to one bedroom per person or for a couple living together as a household. The tax will see a loss of 14 percent of housing benefit for those with one extra bedroom and 25 percent loss of housing benefit for those with two extra bedrooms. This tax will affect an estimated 660,000 people in the UK. The government claims that this move is aimed at encouraging the effective use of social housing. The move will, however, save the government 465 million pounds in housing benefit payouts. The tax cut benefits are not limited to individuals; there were also adjustments made to benefit businesses. The tax cuts to the businesses were done under the claim that they need to grow and succeed. It was also aimed at making the UK an attractive place for investments. The changes are also part of a long term roadmap undertaken by the government in an aim to have a more competitive tax system. The reduction of corporate tax to 21 percent makes the UK the lowest corporate tax rate in G20 (Buttler, 2014). The rate of corporate tax in the UK has been on a downward spin for quite some time. In 2010, the rate was at 28 percent and in 2013 it was adjusted to 23 percent. In 2014, the rate was lowered by another 2 percent to reach 21 percent and is expected to reduce by a further 1 percent in 2015 to make it 20 percent. The road map also includes the introduction of ‘patent box’ that will attract 10 percent tax on profits obtained from the development and exploitation of patents. Creative high tech industries are also expected to get a tax relief of up to 100 million pounds. The tax relief for creative high tech industries came into effect in April 2013. Another benefit of the tax policy will be seen by businesses on employment allowances against employer national insurance costs. This is aimed at encouraging start ups and the creation of more jobs. This tax cut is also applicable to charities. According to gov.uk, (2014) when the employment allowance come into effect, they will benefit over 1,250,000 million employers majority of who are small business owners. It will in turn result into an estimated 400,000 small business will no longer need to pay National Insurance for their employees. Conclusion Even though most of the tax cuts have been received well by the people of UK, there are critics who think that the government is making a mistake by giving people tax reliefs. Proponents of the tax cuts argue that the tax cuts especially the reduced corporate tax rate have made the UK more competitive. The country’s competitiveness has increased. There have been concerns that the tax cuts will lead to an increase in the country’s deficits. The rich are paying less tax while lowest income earners are not paying any taxes at all. At the centre of tax cuts is the reduction of tax rates for the rich in the UK. Supporters of the tax cut move argue that the rich have been overtaxed when the rate was at 50 percent. The biggest backlash, however, has been from the opposers of this move who state that, with a large government deficit, the country does not need to cut taxes for the rich when the rest of the population is struggling to make ends meet. With the election coming up in 2015, it has become political with the labour party claiming that they will return the rate of taxing the rich to 50 percent. The BBC news channel took views from various people on their thoughts about the cut tax for the rich; those who were against the tax cut further claim that it will reduce the tax collected by the government (BBC new online, 2014). Conservative treasury minister said that increasing the rate to 50 percent would raise little if anything. While Chancellor George Osborne, said that raising the rate to 50 will damage the UK economy. Research from HRMC reveals that raising the tax for the rich will not have much effect as claimed by those who oppose it. Source: HMRC Vince Cable also stated that the tax cut will only be valid if there is a good alternative like tax on high value property was in place. Unions like the Unite Union were of the view that, with a pledge to increase the rate to 50 percent, it shows that the party understands the need for a fair tax system in the UK. However, the director of Tax Research UK was of the opinion that raising the tax to 50 percent will not have a positive effect because it worked but was greatly undermined when it was in place. The 50 percent has been said to be the best way to balance up the UK economy. Another tax cut that has been criticized in the bedroom tax. Critics claim that it will lead a loss of 728 pounds per year for the people in social housing. According to Patrick Butler (2014), the bedroom tax will take away tax relief from the poorest social tenants and will not improve the housing problems in the country. He adds that it will not do its intended purpose of reducing crowding in social housing; it will instead increase crowding. If the government has given tax cuts to low income earners, it is only fair that the high income earners also get a reprieve. They should not be punished for being rich. In support for the governments’ efforts to make the UK economy competitive, the tax rate for the rich should also be left at the rate of 45 percent in order to encourage them to invest more in the country thereby providing employment and increasing economic growth. References BBC news online (2014). The return of the 50p top rate of income tax. Retrieved from: http://www.bbc.com/news/business-25895480 [Accessed 08, April, 2014] Buttler, P., 2013. Welfare reform: The bedroom tax, ‘a policy that has no logic’. Retrieved from: http://www.theguardian.com/society/patrick-butler-cuts-blog/2013/jan/16/welfare-reform-bedroom-tax-policy-that-has-no-logic [Accessed 08 April, 2014] Gov. uk (2014). Working tax credit. Retrieved from https://www.gov.uk/working-tax-credit/what-youll-get. [Accessed 08, April, 2014] Gov.uk (2014). Tax cuts for businesses worth over 11 billion per year 2014-2015. Retrieved from: https://www.gov.uk/government/news/tax-cuts-for-businesses-worth-over-11-billion-per-year-in-2014-2015 [Accessed 09, April, 2014] Pettinger, T., (2014). UK National debt. Retrieved from: http://www.economicshelp.org/blog/334/uk-economy/uk-national-debt/ [Accessed 08, April, 2014] UK public spending. Com (2013). Government total spending, 2013 Retrieved from: http://www.ukpublicspending.co.uk/total_spending_2013UKbn [Accessed 09 April, 2014] Read More