Should the UK Government Restore the 50% Additional Income Tax Rate - Assignment Example

Should the UK Government Restore the 50% Additional Income Tax Rate al Affiliation) Key words: 50p income tax rate Introduction The Shadow Chancellor, Ed Balls, earlier this year spoke of the Labour Party’s desire to increase the top rate regarding income tax to 50 % when on the chance that it emerges victorious in the coming elections. The rate was initially applied to incomes that were higher than £150,000 and ceased to apply in 2013, when the current government reduced the rate to 45%.This has led to the ongoing debate as to whether the government of the UK should revert to the 50% additional income tax rate. A brief history of the current tax system is traced to 1979, when Margaret Thatcher’s government reduced the tax rate from 83p to 60p, which was later reduced to 40p in 1988 (Robson 1988). However, the tax rate was increased to 50p in 2010. Arguments against There are differing opinions regarding the effect of the 50p tax rate with some supporting the decision while others firmly against it. A number of high profile economists have advised the government to not adopt the 50p tax rate because it will be responsible for long lasting adverse effects on the economy (Midwinter 1993). In a study conducted in 2010, it was noted that the 50p tax rate affected around 310,000 people. Criticism has been put forward regarding the effect the tax rate will have on UK’s ability to be able to compete in the international market. The tax rate will have the effect of making the UK a less desirable destination for workers in the local environment and for foreign investors. One of its major disadvantages as presented by critics is that UK was suffering because of the 50p plus marginal tax rate as evidenced by its chief creators have admitted that it was established in the absence of a logical economic purpose. Analysis by HMRC suggests that the policy if instituted again is going to lead to a loss in growth for a period of ten years coupled with lost revenue in the region of £ 350 billion. Evidence gathered from other countries such as France, Russia, Hong Kong and India in 2012, asserted that the punitive tax rate failed to yield any public revenues and was damaging the economy. The UK had would essentially succumb to a non-competitive regime of tax. A study was conducted by KPMG in 2010, when the country was using the 50p rate showed how badly the country compared to other European nations with reference to personal income tax rates where UK was ranked number 83 out of 86 countries. A number of high rate taxpayers are regarded as creators of wealth due to other ability to forecast economic trends and pursue economically viable investments (Bell 1995). By taxing a large proportion of their income, this category of taxpayers has resulted to adopting a number of measures to deal with the issue. The measures implemented range from retiring early and working less, moving to other countries that have a lower tax rate, using more of their time and resources to schemes that promote tax avoidance, postponing their incomes to the future through methods such as refusing to pay dividends and bonuses, transferring their assets which generate income to their family members or relatives who are faced with lower tax rates, by forwarding more of their income to provident and pension funds which are not taxed as punitively and by holding and adding funds in firms and settling to sell the firms in the future when capital gains tax rates are more favorable (Derry 1993). According to a YouGov policy survey conducted in 2010 when UK was using the 50p plus marginal tax, of the firms in the financial sector surveyed close to 25% of them were either considering leaving or had already relocated their businesses out of the country and an additional 2% of those interviewed were in the process of relocating to more accommodating countries such as Sweden. YouGov also interviewed a variety of senior managers and close to a quarter of them predicted that their firms would relocate parts of their operations to other countries in the near future and cited the punitive tax regimen as primary factor when making that decision. A very small percentage thought that there firms were going to increase their operations in the UK.A number of firms at the time had relocated and the estimated loss in revenue was estimated at over 3billion pounds. By implementing the tax rate further firms are surely going to relocate. In 2011, there was a shift in personnel that culminated in high levels of brain drain especially those that provided professional services in hedge fund firms. At the time around 700 firms had relocated or were considering relocating out of Britain’s number of the firms had moved parts of their operations overseas while others especially the mid-sized companies with a majority of them relocating to Switzerland and Malta (Horan 2010). The negative effects of the high tax rate are reported in the surveys conducted by CBI-Deloitte and the other one by Adam Smith Institute. According to the 2010 CBI-Deloitte survey, investors were finding it harder to entice employees from abroad for the purpose of working in the UK chiefly because of the 50p tax rate. Many potential employees preferred to work in Asia or Latin America which had more suitable claimable allowances and tax rates. Many multinationals in the UK were aloe unable to compete due to the unstable and volatile economic environment present at the time. On the other hand, the study by Adam Smith Institute in 2011 asserted that the UK had failed to provide an environment allowing businesses to operate under a simple tax policy, a tax rate that was competitive on a wide variety of income brackets and the tax policy lacked transparency, consistency and certainty (Genders 2013) .The 50p tax rate was heavily blamed for the exodus of senior executives to other countries in the EU with favorable tax rates. The English Premier League is arguably the best football league in the world and until recently, it had experienced a high rate of drain of talented football players from the EPL to other leagues in countries that offered better tax rates such as Spain which instituted the Beckham’s law where foreign players playing in the league would be taxed at a rate of 24p almost less than half the tax rate (50p) in England. The tax rate also led to a failure to attract top tier footballers to the EPL in the last couple of years. The recent reduction of the tax rate to 45p has enabled the EPL to attract top footballers from clubs like Real Madrid but it should be worrisome to FA officials and other stake holders if the 50p tax rate is reinstated in future (Rym 2004). Arguments for By restoring the 50p tax rate would greatly aid in restoring equality or at least reducing the levels of inequality. One of the factors that determine a good tax system is its ability to fairly redistribute wealth for the purpose of aiding the low income households. The use of a progressive tax system can achieve that. Britain has a high disparity between the rich and the poor where a footballer may earn £300,000 in weekly wages while a casual labourer earns less than £100 in the same time period (Apps 2011). The government is entitled to tax such high income earners high tax rates in order to be able to provide public facilities such as parks to the less privileged. Countries in the EU have been hard hit by the global financial crisis that begun around 2010.Countries such as Greece needed bail out money from the EU and the IMF. The 50p tax rate was very helpful in trying to stabilize the economy of countries in the EU. The crisis has not been entirely dealt with and there is need to revert to 50p additional income tax rate system in order to reduce government deficit and respond adequately to the recession (Engel 1999). The additional tax levied would also be useful in establishing a strong economic model based on sound ideological prepositions especially with regards to property taxes for houses valued at more than £ 2 million. According to reports conducted this year, persons earning above £ 150,000 paid taxes worth £ 10 billion more when the tax rate was 5O% than in the current period where tax had been reduced to 45% The use of 50% marginal tax rate can be classified as reasonable because the higher the income earned, the higher the amount of tax levied. It is only logical that the burden of a huge budget such as that of the UK should fall more on the shoulders of the richer proportion of the population (Levin 1998). The Shadow Chancellor argues that in order to aid in reducing the current government deficit, there is need for the use of the 50% rate. He is of the opinion that tax burden should be carried by those with higher wages because they can be able to bear the impact and burden of tax rather than relying on the lower classes. Conclusion The 50p additional marginal tax rate in its initial phases was necessary especially due the global financial crisis and austerity measures developed by the EU to curb the effects. However, in the long run, the use of the tax rate is not going to be beneficial especially with the government trying to reduce its debt deficit since many investors and workers are going to immigrate to better environments. The government should therefore not restore the 50p tax rate. References Apps, P., 2011. Welfare Options Under Less Progressive Tax Rates: An Analysis of Distributional Effects for Working Families. The Australian Economic Review, 52-65. Bell, D., & Levin, E., 1995. Tax clientele bias in the term structure of UK interest rates. Stirling: Dept. of Economics, University of Stirling. Derry, A., & Pradhan, M., 1993. Tax specific term structures of interest rates in the UK government bond market. London: Economics Division, Bank of England. Engel, Eduardo M. R. A., and James R. Hines., 1999. Understanding Tax Evasion Dynamics .Cambridge, MA: National Bureau of Economic Research. Print Genders, D., 2013. The Daily Telegraph tax guide 2013 understanding the tax system, completing your tax return and planning how to become more tax efficient. London: Kogan Page. Horan, S. n.d., 2010. Withdrawal Location with Progressive Tax Rates. Financial Analysts Journal, 77-87. Levin, E., & Wright, R., 1998. How large is the tax clientele bias in the term structure of UK interest rates? Applied Economics Letters, 429-432. Midwinter, Arthur F., and Claire Monaghan., 1993. From Rates to the Poll Tax: Local Government Finance in the Thatcher Era. Edinburgh: Edinburgh UP. Print. Robson, M., 1988. Estimating tax rates on income from capital in the UK from official statistics. London: LSE Financial Markets Group. Rym, E., 2004. Average marginal tax rates in the UK economy. Applied Economics, 2369-2372. Wealth Management Planning The UK Tax Principles. 2010. John Wiley & Sons. Read More