Should the UK Government Restore the 50 Percent Additional Rate of Income Tax - Case Study Example

Should the UK Government Restore the 50% Additional Rate of Income Tax? Table of Contents Table of Contents 2 The Recent History of the Additional Rate of Income Tax in the UK 3 Revenue of UK Raised Through Tax 5 Overview of the Effects of the Increased Tax Rate 5 Arguments in Favor and Against the Restored Rate of 50% 6 Conclusion 8 References 10 Bibliography 12 Introduction The United Kingdom (UK) is considered as one of the highest tax paying countries of the world, as a result of which, its economic growth and competitiveness has been badly affected. Among all other countries, the tax rate applicable in the UK is comparatively higher and thus, the tax payers are forced to pay taxes at a higher rate. Majority of the population is included under higher slab of tax rate. In between the year 1997 and 2008, the number of tax payers belonging to the 40% slab had nearly doubled. As a result of the increase in earnings and inflation in the UK, the amount of tax charged from them also grew higher. The allowances were however made tax free for the people but the slab for the tax rate rose from 50% to 60%. In plight of this amendment in the taxation system of the country, the UK government has witnessed massive criticisms pleading for reduction in the income tax rate from 50% to its previous 40%. As a result, more than 7 million people are falling under the high rate of tax slab. Thus, it can be identified that the country is suffering from a 50% plus marginal tax rate, owing to which it is suggestible that the UK government should take some measures in order to fix a definite tax rate (Browne & Roantree, 2012; Young & Saltiel, 2011). The Recent History of the Additional Rate of Income Tax in the UK The tax structure of the UK has been quite unstable and changing since the past few years. According to the previous income tax policy, charges were imposed on the income of a person, regardless of who would be benefited from that income. However, the scenario changed wherein the current scenario indicates that the income tax is charged only on the income of that ‘beneficially entitled person’. It is noteworthy in this context that with the introduction of the corporation tax in 1965, majority of the companies of the UK were considered with exclusionary benefits for these charges. However, with the introduction of the Income Tax Act 2005, all the schedules in the Corporation Tax 1965 was abolished, creating a new system of taxation, leading to the introduction of the Corporation Tax Act 2009 and 2010. In the midst of these fluctuations, in the budget of 2010, a new income tax rate of 50% was imposed by the government of the UK. This rate has accordingly been considered as applicable to citizens with earnings ranging to more than £150,000 (Telegraph Media Group Limited, 2014; Atkinson, 2004). As per the fiscal year 2009-2010, the basic tax rate charged was 20% for the person whose income was within £37,400 while the top rate of income tax charged was 40% and was applicable to the person whose income was above £37,400. However, from the fiscal year 2010, an additional 50% tax rate became applicable to those who have an income of more than £150,000 per annum. However, if the basic personal allowance of a person is below £100,000, it is considered as tax free, and if the income limit of an individual is above £100,000, the allowance amount is reduced by ‘one pound for every two pounds’ above the income limit. Although from a generalized view, increase in tax rates may be observed as a measure that can reduce fiscal deficit in the country by accelerating its earning capacity, a critical analysis of the context shall reveal that in the hike may lead to the reduction of personal allowances of the chargeable citizens to nil (TV-Novosti, 2014; Atkinson, 2004). Thus, the increase might actually not work in the overall development of the society. Revenue of UK Raised Through Tax In the fiscal year 2012-2013, total government receipt of the UK was forecasted at £591.7 billion or 37.5% of its total GDP, which accounted for nearly £9,400 per person. Apart from income taxes, the other sources of revenue, when considered among the individuals, come from the rent of the properties owned by the government as well as from the surplus of the industries of private sector. It is noteworthy in this context that the largest sources of revenue contributions to the government of the UK come from Income tax, VAT and from the contributions of the national insurance. This accounts for nearly two third of the total tax revenue. Moreover, indirect taxes and other duties imposed by the government contribute for nearly 11 percent of the total receipts. The fuel duties are also considered to be the major sources of contribution to the government, which accounts for nearly £27.3 billion. The other source of revenue to the government may be considered as the taxes received from the private sector companies that accounts for nearly 12.5 percent of the total receipts (Browne & Roantree, 2012). Overview of the Effects of the Increased Tax Rate By comparing the tax rate on an international basis, it is found that the higher 50% tax rate of the UK has resulted in an uncompetitive tax regime within the country. Concerning its possible negative effects on the economic health, the OECD has also recommended the government to reduce higher rate of personal tax structure, as they may hamper the work incentives as well as discourage entrepreneurship initiatives of the highly skilled workers over the long run. According to the evidence from various countries like the USA, Russia, France, Canada and India, has proved that imposition of high tax rate will result in failing to produce public revenues and thus, hamper the growth of the economy, when considered in the long-term. According to the survey conducted in Young & Saltiel (2011) it was identified that majority of the high rate tax payers are the creators of wealth, who are highly concerned about their economic wellbeing. As they have to pay a larger part of their income as income tax, there incentive structure also changes and thus, most of them are quite likely to prefer adopting various measures in order to save larger proportions of their income. On the other hand, public having income range as lower than the threshold determined, may focus on working less and retiring earlier or may immigrate to other foreign countries where the rate of income tax is lower. They may also prefer to contribute more to their pensions or may plan to transfer their wealth creating assets within the family members on whom the rate of income tax imposed is lower. Moreover, the increased tax rate may hamper the financial condition of the government, which may in turn result in recession within the economy, creating high chances of financial bubble (Young & Saltiel, 2011). Arguments in Favor and Against the Restored Rate of 50% Based on the above discussion, it becomes apparent that arguments concentrating on the stated issue have been in favor as well as against the restoration of the 50% tax rate applicable in the UK. Contextually, many business leaders and politicians have argued that, applicability of the 50% tax rate to the individuals earning more than £150,000 is practically applicable only to the top earners of the country, which will comprise an average of one percent of the total tax payers. According to this tax structure, the rich people will have to pay higher taxes, which can be regarded as a positive measure taken towards the wealth maximization objective of the country. Four reasons are stated in this respect, favoring the strategy adapted by the country. Firstly, hike in the tax rate will encourage the people of the UK to work harder and earn more money or seek better opportunities to save more of their income and thus, directing the population towards increased savings and decreased expenditures. Secondly, there would be few rich people, who would be willing to relocate their business to other countries, leading to the overall distribution of wealth in a more sustainable manner. Thirdly, majority of the people of the UK would try to establish their business in their own country, hence, increasing the scope for generating higher income. Fourthly, there would be lesser chance of avoiding taxes by the people (Seely, 2014; Atkinson, 2004). On the contrary, theorists opposing the idea of tax hikes owing to its negative impacts on the long-term sustainability of the economy concluded that change in this tax rate will affect 1-2% of the total tax payers of the UK, which might although seem insignificant in the short-run may yield stronger negative effects in the long-turn, raising a situation of financial bubble within the economy. Hence, in order to solve the problem, the UK government is required to take some medium term measures (Seely, 2014). However, as compared to the public, in the short-run, the bankers would be affected more negatively owing to the implementation of 50% income tax rate. Furthermore, it is arguable that raising the tax rate to 50% was not the actual intention of the government to impose higher tax rates on the rich people. However, with the changes made in the overall tax thresholds, not only has the tax limit increased for the richer people within the UK, but also for the lower income people within the country (Guardian News and Media Limited, 2014). It has therefore been argued that in order to raise the revenue of the government and suffice the objective of economic development, focus should have been imposed on implementing higher tax rates on the richer section of the economy, rather than the people with lower income range. However, it was also argued in this regard that targeting a minor group of rich people within the country might not have been considered as a wise decision by the government for collecting revenues, and therefore, rather a broader tax base was required. The previous top tax rate of 40% was the revenue maximizing rate by the government. However, increase in the tax rate to 50% has not only affected the rich people, but has also negatively affected the exchequer of the UK (The Institute for Fiscal Studies, 2014). Moreover, arguments against this particular initiative have also been made with regard to the fact that the imposition of new tax rate of 50% that have been negatively affecting the performance of the UK economy. Increase in the tax rate has a negative impact on the civic society too, as it has resulted in the supply of lesser money for public services and as a result, the charitable activities have been impacted badly within the economy. Nevertheless, irrespective of the negative arguments related to the imposition of higher tax rates, according to the audience poll taken after the budget, it was observed that the general public was in support of the new tax rate policy imposed by the government. More than 57% of the people of UK were also reported supporting the tax rate. However, there are some economists who are on a belief to abolish the 50 percent tax rate policy of the government, specifically owing to its long-term negatives rather than emphasizing its short-run benefits (The Institute for Fiscal Studies, 2014; Atkinson, 2004). Conclusion Staying precisely, the above arguments conducted both in favor and against the imposition of tax hikes in the UK by additional 50%, revealed its dual effect in the short-run and in the long-run. While in the short-run, the measure is quite likely to enrich economic stability within the economy by accelerating wealth distribution and increasing flow of resources in a more stable as well as uniform manner. However, in the long-run, the measure is only quite likely to increase risks of financial bubble and thereby, cause recessionary effects within the economy. Thus, it can be concluded that the negative impact of the high tax rate is more than its positive impacts. Conclusively, to be noted in this regard, this policy mainly targets the rich people within the economy, whose income is more than £150,000. However, it is observed that the group of people falling under this category constitutes only 1-2% on an average, targeting only a minor section of the society, owing to which, focusing on this particular group for collecting revenues by the government may not be a wise decision, being of limited help. Thus, rise in the tax rate is more likely to impose negatively impacts on the economy of the UK. Besides, the multinational companies and other banks will also be affected negatively, owing to which, the restoration of the additional 50 percent rate of income tax shall not be supported. References Atkinson, A. B., 2004. Income Tax and Top Incomes over the Twentieth Century. Instituto de Estudios Fiscales, No. 168, pp. 123-141. Browne, J. & Roantree, B., 2012. A Survey of the UK Tax System. Institute for Fiscal Studies, pp. 1-60. Furchtgott-Roth, D., 2014. The Disadvantages of High Marginal Tax Rates. Testimony Before the Senate Budget Committee, pp. 1-9. Guardian News and Media Limited, 2014. Should The 50p Tax Rate Be Abolished? Bridget Rosewell and Richard Murphy Debate Whether A Top Rate Income Tax Cut Would Stimulate Economic Growth In The UK. The Guardian. [Online] Available at: http://www.theguardian.com/commentisfree/2011/sep/07/should-the-50p-tax-rate-go [Accessed November 29, 2014]. Seely, A., 2014. Income Tax: The Additional 50p Rate. Parliament.uk, pp. 1-43. Telegraph Media Group Limited, 2014. Two-Thirds of Millionaires Disappeared From Official Statistics to Avoid 50p Tax Rate. The Telegraph. [Online] Available at: http://www.telegraph.co.uk/news/politics/9740253/Two-thirds-of-millionaires-disappeared-from-official-statistics-to-avoid-50p-tax-rate.html [Accessed November 29, 2014]. The New York Times Company, 2014. Britain’s Experience in Raising the Top Tax Rate. The New York Times. [Online] Available at: http://economix.blogs.nytimes.com/2012/03/27/britains-experience-in-raising-the-top-tax-rate/?_r=0 [Accessed November 29, 2014]. The Institute for Fiscal Studies, 2014. 50p Tax – Strolling Across the Summit of the Laffer Curve? Observations. [Online] Available at: http://www.ifs.org.uk/publications/7066 [Accessed November 29, 2014]. TV-Novosti, 2014. UK Shadow Govt Eyes Reintroducing 50% Tax Rate for Top Earners. RT News. [Online] Available at: http://rt.com/news/ok-tax-rise-labour-196/ [Accessed November 29, 2014]. Young, P. & Saltiel, M., 2011. The Revenue and Growth Effects of Britain’s High Personal Taxes. Adam Smith Research Trust, pp. 1-31. Bibliography Lymer, A. & Oats, L., 2013. Taxation: Policy and Practice 20th Edition (2013/14). Fiscal Publications. Read More