Nature of UK Taxation Policy - Coursework Example

UK Taxation Policy In the UK, currently, several different forms of taxation are applicable. They can be segregated as progressive and regressive tax forms. Personal income tax takes into account the individual income and therefore, they are variable in nature. The higher earners need to pay the higher percentage of income tax. Along with, everyone needs to pay regressive taxes also such as VAT, fuel duties etc.; its payments largely depend upon individual consumptions. Persons with higher consumption will naturally pay higher proportion of regressive taxes. When economy moves southward, people tend to spend less due to their reduced incomes. That means during recession tax collections through VAT are likely to be affected but at the same time, the government needs to take fiscal measures to boost the economy. The paper explores the nature of UK tax system in the backdrop of various taxation theories; the paper will also critically analyse the impact of direct and indirect taxation on individual tax payers. Nature of Taxation in the UK Taxes in the UK can be divided into two major heads: Progressive and Regressive taxes. Income tax, national insurance, capital gains tax, inheritance tax are progressive taxes while VAT, fuel duties are regressive taxes. Detailed discussion on these taxes follows. Personal Taxes On personal taxation front, the UK taxation system is considered liberal when compared to many other developed countries. As on 6 April 2014, the following taxation rates and exemptions are applicable to individuals (Income Tax rates and Personal Allowances, 2014). 1. The basic rate of taxation is 20 percent on the first £ 31,865 earnings in a year. 2. In the next slab, the higher tax rate of 40 percent is applicable when income falls between £31,866 and £150,000. 3. When taxation income exceeds £150,000, the applicable rate is 45 percent. Moreover, personal allowance of £10,000 is allowed to those whose income is less than £100,000. Personal allowance progressively reduces when income exceeds £100,000. It will be worthwhile to compare highest personal income tax rates of some countries to understand how the UK stands against them. Country % Belgium 50 Canada 29 China 45 Italy 43 Japan 50.84 USA 39.60 UK 45 Source: http://www.kpmg.com/global/en/services/tax/tax-tools-and-resources/pages/individual-income-tax-rates-table.aspx Ability-to-pay is the most known theory of taxation for the last several decades (Lymer & Oats, 2008). The theory is based on the principle that citizens should pay taxes according to their ability to pay. The theory takes into account the principle of justice and equity while levying taxes on the people. Thus, those who earn less than £31,865 are taxed at significantly lower rates than those who earn higher than £31,865. National Insurance Contributions Over and above personal income tax, National Insurance Contributions are applicable to all employees. Applicable rates are 12 percent for those whose weekly incomes fall between £153 and £805. Individuals exceeding the given income levels will pay 2% more (National Insurance Contribution Rates, 2014-15). Capital Gains Tax Capital gains tax rates in the UK are low when compared with some other developed countries. Moreover, Capital gains are exempted up to £11,000. The top rate is set at 28 percent in comparison to 45 percent in Germany, 34.5 percent in France, and 30 per cent in Ireland. From the table below, it is quite clear that contribution of progressive taxation has reduced between 2007/8 and 2012/13. While absolute contribution from income taxes has increased from £151.8bn to £152.3bn, the percentage contribution has reduced by 2 percent, from 29.4 to 24.4. Similarly, contribution to National Insurance has reduced in percentage terms; however, collection in absolute numbers has increased from £100.4bn to £104.5bn. Even capital gains tax has reduced in absolute and percentage terms. This has largely happened due to reduced income levels during the long spell of financial crisis between 2008 and 2013. Progressive forms of taxation means they are levied as per variations in income levels or tend to create wealth transfers from affluent class. Taxes such as capital gains, inheritance tax, National Insurance (also paid by employers other than employees), stamp duty tend to create wealth transfer for social equity. Just before the financial crisis, progressive taxes contributed nearly 58 percent that reduced to 54% in 2012/13. In contrast, regressive taxes such as VAT are collected based on the individual consumption. Those who consume more will need to pay more in terms of VAT. In 2007/8, regressive taxes contributed 25.4 percent of the revenue that increased to 28.4% in 2012/13. On regressive taxation front, VAT is a major contributor at £80.6bn in 2007/8 and £100.7bn in 2012/13; this shows that the government was relying heavily on VAT for increasing its tax collection in these years. Progressive and Regressive Taxation Details in the UK 2007/8 2012/13 Progressive Taxation £bn % £bn % Income Tax 151.8 29.4 152.3 27.4 National Insurance 100.4 19.5 104.5 18.8 Capital Gains Tax 5.3 1.0 3.9 0.7 Inheritance Tax 3.9 0.8 3.1 0.6 Total Progressive Taxes 50.7 47.5 Regressive Taxation £bn % £bn % VAT 80.6 15.6 100.7 18.1 Fuel Duties 24.9 4.8 26.6 4.8 Tobacco Duties 8.1 1.6 9.6 1.7 Spirit, Wine, Beer Air passenger, Vehicle Excise and Insurance premium 18 3.4 22.5 3.8 Total Regressive Taxes 25.4 28.4% Source: http://speri.dept.shef.ac.uk/wp-content/uploads/2014/06/SPERI-policy-brief-5-the-evolution-of-the-UK-tax-base.pdf Environmental Taxes The government in the UK has decided to collect environmental taxes to fulfill the nation’s environmental objectives. The purpose is to bring about positive behaviour changes in the consumers. Those polluting the environment will have to pay more through environmental taxes. The following taxes form a part of environmental taxes. a. Landfill Tax b. Carbon Price Support c. Climate Change Levy d. EU Emissions Trading System (EU ETS) e. Aggregates Levy f. Carbon Reduction Commitment Energy Efficiency Scheme The following table shows total revenue receipts from Environmental Taxes in last 4 financial years. From the table, it is evident that total environmental taxes are increasing steadily year after year. This ensures that consumers become more responsible towards environmental cause to mitigating climate change effects. Receipts from environmental taxes will continue to rise in the years to come. 2010/11 2011/12 2012/13 2013/14 Total Revenue from Environmental Taxes (£bn) 2.5bn 3.1bn 3.5bn 5.1bn Total Tax Receipts (£bn) £550.8 £570.4 £591.5 £622.5 Proportion of total tax receipts 0.5% 0.5% 0.6% 0.8% Source: https://www.gov.uk/government/news/definition-of-environmental-tax-published Critical Evaluation Though personal income tax in the UK follows the ability-to-pay principle (Lymer & Oats, 2008) yet it would have been better if one more slab of 30% income tax had been devised for the people having earnings between £31,865 and £100,000. On the personal income tax, it seems unfair on part of those whose income is between £31,865 and £100,000 as they need to pay tax at 40% rates that is substantially higher than the lowest slab of 20%. The principle of fairness is compromised here to some extent. Environmental taxation takes into account the Benefit Principle Theory (Kaplow, 2008). It is also an attempt to optimise tax collection from varied sources so that burden on few individuals or certain class of society is avoided. Those who impact the environment in order to benefit themselves through their activities are liable to pay the environmental tax and accordingly, the government in the UK has begun levying environmental tax on the people, industries and on those who are responsible to damage the environment. The environmental tax needs to be gradually increased if the applicable tax fails to change behaviour of the people, industries and marketers ((Lymer & Oats, 2008). Though normal VAT rates are 15% in the UK but certain items such as common foods, physical education including sports activities, work of art, antiques, charities, donations are totally exempt from VAT. Certain other items such as energy saving devices installed in residential buildings, mobility aids, smoking cessation products, maternity pads, sanitary protection products, electricity used by charity, gas and heating oil, solid fuel for domestic use, building and construction materials for repair purposes, children carry cots and related products attract concessional VAT of 5%. Regardless of its exemption or lower VAT for certain items, VAT is known as a consumption-based tax. Many critics do not support extending exemption to certain items as it becomes entirely difficult to assess whether benefits reach to only those who are entitled. Impact of Direct and Indirect Taxation on Individuals In the UK, shift towards indirect tax has resulted into lower personal income tax and corporation tax rates in recent years. When economy is already in grip of recession such shift from direct to indirect taxation will help workers to work for more hours and increase their real incomes. Reducing direct tax also increases the opportunity cost of leisure time. People tend to contribute more expanding supply of goods and services. Moreover, due to provision of personal allowance of £10,000 workers are motivated to work until they reach to the earnings of £100,000. Also, beyond the income of £100,000 personal allowance reduces only progressively so that does not discourage workers to withdraw suddenly at £100,000. Direct taxes take away a portion of income from individuals regardless of spending any penny on own personal consumption. While indirect taxes such as VAT, fuel or tobacco duties are levied only when the person consumes those items on which these taxes are levied. That is why they are also known as the consumption taxes. However, certain sections of society such as disabled class or students or sportspersons are exempted as the government does not want them to bear the burden even if they are consumed for personal needs. The idea behind exemption is to motivate (students and sportspersons for their activities) or support (disabled people) because of their limitations. Thus, the government has attempted to bring equity, justice and fairness through their progressive and regressive tax proposals in the UK; however, it is difficult to satisfy all citizens fully. Nevertheless, the government has been successful in its motive to garner resources for social and development causes to a large extent. References Bailey, D., Craig Berry. (2014). The Evolution of the UK Tax Base. Sheffield Political Economy Research Institute. [Online] Available from http://speri.dept.shef.ac.uk/wp-content/uploads/2014/06/SPERI-policy-brief-5-the-evolution-of-the-UK-tax-base.pdf [Accessed 5 December 2014] Income Tax rates and Personal Allowances (2014). gov.uk. [Online] Available from] https://www.gov.uk/income-tax-rates/current-rates-and-allowances [Accessed 11 December 2014] James, S. & Nobes, C. (2012). The Economics of Taxation. 12th ed. Birmingham Fiscal Publications. Kaplow, L. (2008). Theory of Taxation and Public Economic, Princeton University Press. Natonal Insurance Contribution Rates (2014-15). [Online] Available from] https://www.gov.uk/government/publications/tax-and-tax-credit-rates-and-thresholds-for-2014-15/tax-and-tax-credit-rates-and-thresholds-for-2014-15 [Accessed 11 December 2014] Lymer, A. & Oats, L. (2008). Taxation Policy and Practice. 14th ed. Birmingham Fiscal Publications. Smith, Chloe (2012). Definition of Environmental Tax. gov.uk. [Online] Available from https://www.gov.uk/government/news/definition-of-environmental-tax-published [Accessed 5 December 2014] Read More