The Taxation System in the United Kingdom - Essay Example

Should the UK government restore the 50% additional rate of income tax? Contents Introduction 3 Discussion 4 Conclusion 10 References 11 IntroductionThe taxation system in United Kingdom mainly involves minimum payment to central and the Local government. The central government collects the revenue from the income tax, corporate tax and Value added tax. The local government collects revenue from the grants that are provided by the central government together with the business rate that is prevailing in England and Wales. Adam Smith have defined the tax system on the basis of the characteristics of the tax system based on the good tax principles which includes it should be equitable, convenient, certain and economically efficient (Mankiw, 2008). The tax is to be charged on the basis of the cash flow generated as it will provide fiscal neutrality for undertaking investment decision of the business. The impact of tax also affects the personal investment decisions of the individual (Andersson, Eberhartinger & Oxelheim, 2007). The arguments were placed to justify whether the government should restore the 50% additional rate of tax. As the people or the individual who are against the increase in tax rate viewed and believed that that the tax cut will increase the return of the high earning individual and it will increase the tax yields resulting in the higher economic growth. Again the group who supported that the increased in the tax rate were of the view that it will generate revenue to the economy. They justified there point with the help of Laffer curve. Discussion The discussion on the topic that should the UK government restores the 50% additional rate of income tax. The decision or the strategy of cutting down 50% rate of income tax was adopted for cutting down the tax rate of those individuals earning more than 3000 pound per week (BBC, 2008). Figure 1 Impact Due To Change in Tax Rate The tax is distributed on the basis of progressive, regressive and proportional tax rate. The progressive tax rate can be defined as the tax rate which increases with the increase in the amount taxed (Sperling, 2005).The regressive tax rate is just the opposite of the progressive tax rate where the tax rate decreases with the increase in the taxation amount. And rational tax rate is stagnant as it is not affected by the increase or decrease in the taxation amount (BBC, 2011). The tax structure of U K is progressive in nature as it charges high tax rate from the higher income group. This results in the payment of zero tax for those individuals who earns less amount of money. The tax rate is arranged in such a way that an individual earning 34000 pound will make a payment of 40% marginal tax rate. The marginal tax rate can be described as the increase in the average rate of tax with the increase in earning. The income tax of UK is progressive but the other tax that is levied by the UK government is of regressive in nature (Karasavvoglou, & Polychronidou, 2012). The Value Added Tax is charged for 20% which is of regressive nature. The impact of this VAT rate is affecting the lower income group as they are paying higher amount of tax as compared to the income earned by them. Vat is charged on the consumable goods which are of necessity but it should be charged on the luxury goods so that it doesn’t affect the lower income group. The council tax charged by UK is also very regressive as the individual with higher income group has the ability to buy house at expensive areas (Bernardi & Profeta, 2004). Figure 2: Government receipts 2011-2012 The main problem that is faced by the UK government is the avoidance of tax by opening offshore accounts. This tax avoidance is mainly done or practiced by the people or the individual of higher income group (Chapman, 2014). The practice of charging higher tax rate to the richer and vice –versa can be applied only in case of a direct tax. But the indirect tax remains unaffected as the tax charged on that item remains same irrespective of the class of the people. Any individual may be rich or poor has to pay the same rate of tax irrespective of the earning (Duffy, 2013). Figure 3 Distribution of UK taxation Therefore it is required that the indirect tax must also be progressive depending on the situation. The implementation of 50% increase in the tax rate is supported with the help of the Laffer curve. The arguments that are forwarded by the founder of the Laffer curve Art Laffer is that at a particular rate of tax the revenue will be increased (Goodley, 2014). The diagram indicates that if the rate of tax is at 0% then the revenue will also be 0%. And if the rate of taxation is 100% then the revenue will not increase as no one would work. Therefore if the tax rate increases from 0% the revenue would increase. A tax rate should be selected between 0 to 100%. This will increase revenue. The proposition of the labour is that the introduction of 50% rate of income tax will lead to the increase in revenue which is indicated by inserting economy to the top left of the laffer curve. This signifies that the curve is rising with the current level of income. The rise in the tax rate can be supported by the fact that the increase in tax rate will lead to the increase in the tax revenue and will utilize the marginal cost for reducing the deficit budget. HMRC suggested that the cut in the tax rate from 50% to 45% will reduce the revenue by around 3.5 billion pound if there is no effect on incentive. Therefore it signifies that an increase in the tax rate from 45% to 50% will lead to the little increase in the extra tax. It have also placed a question that whether the increase in the tax rate from 45% to 50% will have the opposite effect with the decrease in the tax rate from 50% to 45%.. The HMRC analysis reveals and discloses that there is a doubt about how HMRC can contribute towards the reduction of tax evasion and avoidance (HMRC, 2012). The main controversy in increasing the tax rate to 50% is that the main objective of the government is cutting down the budget deficit. But it will also affect the economic growth and development that will result in the avoidance of the recession. Arguments in Favour of increase in tax rate from 40% to 50% and restoring it: 1. The main objective behind imposing 50% tax rate of above income group of 1, 50,000 pounds was established was to increase more equity. 2. There are few richest persons of UK who are in favour of increase in tax rate and have no objection in paying the higher rate of tax. 3. Scrapping of the tax rate will be an immoral and unfair practice. 4. The figure indicates that by the year 2015 and 2016 the top tax rate will provide an extra revenue of 3.2 billion pound revenue in the economy than the revenue that would be generated by maintain the tax rate at 40% 5. The imposition of mansion tax will reduce the price of the home in England. 6. Sales tax was increased from 17.5 % to 20%. The sales tax has not risen so high so far. The sales tax was increased with the objective of reducing the deficit budget of the country (Davis, 2008). 7. The increase in the tax rate was necessary for the economic recovery of the country. 8. The increase in wealth tax will help the country to face and handle the long and short term challenges. This will help the economy in generating more revenue. The importance of wealth tax is more in United Kingdom as compared to the other countries because it will lead to the generation of gross development product (Wheelwright, 2007). Figure 4 Wealth Tax 9. As all tax is not paid equally by people and it is difficult to calculate and compare other tax rates. Therefore income tax is the tax that is paid by most of the people and the payer will get some relief by paying other kinds of taxes like the tax related to children and social security (OECD, 2011). 10. The increase in tax rate has lead to the control of debt of the economy. 11. Tax rate is not directly related to employment as employment is affected by the factors such as labour market, growth, flexibility, and different skills. Arguments against restoring 50% tax rate: 1. The top economist is of the view that the tax rate should be scrapped or reduced as it is creating obstacles and difficulties for the entrepreneurship and which is forcing the top potential payer of tax to leave United Kingdom thereby creating difficulty for economic growth (Hyman, 2013). 2. It will reduce the mansion tax rate because if the mansion tax rate is increased the people will suffer as it will result in paying more money for home tax than the amount they paid for buying the property. The mansion tax is paid annually by the owners of the house in United Kingdom whose value is more than 2 million pound. This will force the people to leave United Kingdom (Mirrlees, 2011). 3. If the people move out of England it will lead to decrease in output and lack in entrepreneurship and there will be no growth in the economy. 4. The employment will decrease as the entrepreneurs leave United Kingdom. 5. International competitiveness of the United Kingdom will be adversely affected as it will be considered as less attractive place for investment. 6. The establishment of the mansion tax will compel people to sell their house as the people will be unable to pay the high rate of home tax. 7. The increase in sales tax has affected the people in the country. As they have to pay more tax for all consumable goods. It has adversely affected the poor income group. 8. It will provide competitive advantages to its neighbouring countries. 9. The higher tax payer is contributing more than 60% of their income to the government. This signifies that United Kingdom is now on the right hand side of the Laffer curve which indicates that the higher rate of tax will result in overall lower growth of revenue (J, 2013). 10. Before the increase in tax rate in United Kingdom from 40% to 50% there were more than 16,000 people who were categorized among those whose income is 1million pound. But with the increase in tax rate it is found that the people have decreased from 16000 to 6000. This people adopted many measures to evade tax as some left the country, some have found out false means to escape payment of tax and some have started working less than before (Karasavvoglou & Polychronidou, 2013). 11. It will affect the employment adversely as the high rate of income tax will lead to poverty and there will be no incentive to shift from the benefits provided for the paid work. Since the income after tax is not considered as better than the income received from the benefits. 12. Lower rate of tax will earn more tax from the richer section. 13. The government has estimated a loss of around 7 billion pound with the increase in tax rate. Conclusion The topic should government restore the 50% additional rate of income tax is a topic of debate as the increase in the tax rate has both advantages and disadvantages. It will affect the economy both positively and negatively. But with the increase in the tax rate the economy suffered a loss of 7 billion pound and many of the large income people have left the country (Arnold, 2013).The people left the country due to the loss in revenue due to the higher rate imposition on stamp duty VAT. It is found that it has caused damage in the economy by reducing the revenue. On the other hand it cannot be ignored that the increase in tax rate have increased the equity and it will generate revenue in future (Agrawal, 2007). Therefore it can be concluded that the increase in tax rate in the country have little increased the revenue but the increase in revenue should be visible to everyone and if the revenue is increasing than the increase in tax rate should be supported as it is a small amount to be paid in order to enjoy the comfort of living and working in the society. References Agrawal, K.E. 2007. Direct Tax Planning and Management. New Delhi. Atlantic Publishers & Dist. Andersson, K., Eberhartinger, E. & Oxelheim, L. 2007. National tax policy in europe: to be or not to be? Vienna: Springer Science & Business Media. Arnold, R.A. 2013. Economics. Masson: Cengage Learning. BBC, 2008. Darling unveils borrowing gamble. [Online]Available at: http://news.bbc.co.uk/2/hi/7745340.stm. 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