The 50 Percent Additional Tax in the UK - Essay Example

The 50% Additional Tax in the UK Should the UK Government Restore the 50% Additional Rate of Income Tax? Introduction Income tax forms a critical source of revenue for every government. The amount of revenues collected depends on the tax systems of the country and their economic status. Tax reforms remain controversial in the UK based on the current debate on whether to maintain a 50% additional tax rate. Adjusting the tax rate has significant effects on the amounts of revenues collected, which instigates controversial arguments (Aaron & Gale 1996, p.10). An example is the United Kingdom, where there are debates on whether to restore a 50 % additional rate of income tax or abolish it. Apparently, the tax rate debate continues to cause controversy among policymakers and politicians in the UK. Differences in viewpoints are evident across political regimes, the most recent being between the Labour and the Congress. In 2010, the Labour Party increased the tax rate from 45% to 50 %. After the Labour Party administration had left office, the next government restored the 45 % rate. During the campaigns, early in 2014, the Labour Party promised to restore the original 50 % if it assumed office. The Labour Party attempted to prevent the move by the ruling party to lower the tax rate. With the new regime in power, under the leadership of the UK Independence Party, the debate remains on whether the UK should restore the 50% additional rate of tax. This paper analyses the two viewpoints of the debate, upheld by proponents and critics, including a recommendation on which of them arguments is justified. Justification for Raising the Tax Rate for High-Income Earners There are arguments that those who are pushing for the restoration of the tax system are seeking equality in terms of tax payment. There is a general concern from the group of leaders advocating ideas promoted by Labour Party that low-income earners in the UK poor pay more taxes than their counterpart high-income earners. During the campaigns in January, a shadow chancellor, Ed Balls, maintained that the government had allowed the rich people in the country a big tax cut by abolishing the 50 % top rate (BBC 2014, p. 1). According to him, that are viable strategies to ease the tax burden imposed on high-income earners by reducing the level of revenue collected from them (Urquhart 2014, p.1). At this point, he is justified in the sense that an increase in the tax rate will literally mean an increase for revenues collected. There is evidence that this scheme works to raise more government revenues in the short run, which the chancellor capitalises on and condemns the previous government of having caused the country to lose about 100 pounds per year with the scraping of the original system. There is a feeling that the move to lower the tax rate for those who earn higher in the economy is unfair. Apart from direct loss of the revenues collected pre year, the system reduces the tax revenue collected from this same category, which in the eyes of the poor is unfair. Everyone expects that the government should also lower the tax rate for those who do not fall in the same category. In such a situation, equality is achievable. Lowering the rate of tax causes reduced revenue collection. This point justifies the move to raise the tax rate. When the government does not raise enough money, the economy slows because it will not effectively run all sectors (Poterba 2007, p.45). Arguments against Raising the Tax Rate for the High-Income Earners It is vital for policy makers to have a succinct analysis of the effects of raised tax rate on high-income earners based on professionals’ viewpoint. Sources indicate that such a move is harmful to the economy in the ways that this paper explains. There are various studies to compare the effects of tax rate increase in diverse countries such as the United States, India, Hong Kong, Canada, and Russia. The results of the studies indicate a decrease in the tax revenue earning from high-income earners. The results contradict the opinions of Ed Balls. There is a conventional assumption that he was arguing from a short-term perspective. Reasons given for these findings are the following: Response from the Affected Population of High-Income Earners The Finance Sector The finance sector is a fundamental contributor to the development of the economy in the UK. According to sources, by 2009, it accounted for about 66 billion Pounds and provided employment opportunities to an estimated 1 million people (James, 2009 p.35). It represents nearly 10% contribution to the GDP of the country. It is imperative to note that this industry is the most mobile, and, therefore, a move that will tend to frustrate its performance will make other destinations more favourable. Raising the tax rate will make the cost of doing business and the motivation to work in the UK expensive (Gravelle 1994, p.23). Investors will fear taxation of their excess profits. It is logical that other places, which have lower tax rates, will be preferential. In the US, states with no additional tax attracted an influx of immigrants from states with the highest tax rates. These emigrants move with their capital and invest in their new homes. By 2008, the states had a record 800, 000 new residents, with a growth of about 900 million Dollars. Contrary to that, the costs of starting and managing entrepreneurial ventures in the UK under hefty taxation or in highly taxed regions scare away investors and discourage economic progress. A similar situation is a comparison of the importance of the City of London with others such as New York. Before the United States passed harder terms for business people in New York City, the city was preferred to London by many with the trend only reversing recently (Mahr 2007, p.97). It attributes to the fact the UK is among the countries that impose a high level of taxes on its citizens. Because of the high-level of taxation in the UK, entrepreneurial venture and many business people are migrating to Switzerland, a neighbor to the UK with lower tax rates. Other High-Income Earners The category constitutes fashion designers, the arts, and media investors. As an example, the entertainment industry would prefer to shoot movies in other places apart from The UK because of the high rate of taxation. Some have opted to do it from the Netherlands where their earnings have lower tax rates imposed. The Sports Sector Sporting activities in The UK form an integral part of the economy (Noll & Zimbalist 1997, p.88). The Premier League is the most televised the most attractive and the most competitive in the world. Its ability to attract top players and maintain the lifestyles of football fans is what makes it outstanding. However, the high rates of taxation are beginning to scare some sporting personnel, with an example of Cristiano Ronaldo opting to move to Spain to evade the 50 % tax rate in 2010. Other prominent sportspersons such as Sergio Garcia vow not to work in the country because of the high levels of taxes. Upcoming Professionals With the current trend in the tax system, upcoming professionals may opt not to live and work in the UK. They will find locations where tax is affordable to live and develop their careers or start up entrepreneurial ventures. Studies indicate that the majority of the young elites in the country would prefer to stay in the country because they do not care what the situation represents. Plan of Action A portion of the population may desire to work less and retire early because the individuals develop a feeling that they have secured sufficient wealth to lead decent lifestyles throughout their entire life (Noll & Zimbalist 1997, p.88). High taxation creates demotivation to work in the fear of taxation of an individual’s extra income. Some will opt to change the tax systems to other forms such as normal tax shelters, especially pensions. Demotivation will eventually reduce tax revenues and disillusion the tax collectors. Following the examples outlined, it is prudent for UK policymakers to ensure a careful analysis of the likely situations arising from actions to increase tax rate to 50 %. Economists consider taxation as a tool for regulating the economy, which is why varying it causes the results explained. There are more disadvantages for raising the tax rate in the UK than there are advantages. The argument as to whether a tax system should change involves debate based on fiscal policies (Lockwood & Manning 1997, p.134). The country’s economy will decline should the administration implement the policy. The cost of operating business in the country will significantly rise, attracting a higher cost of products in the market. Instead of improving the lives of the citizens, the system will inflict pressure on the population who earn less. Disparity in the level of earning promotes social inequality as emphasized by Cribb, Hood, Joyce and Phillips (2013, p.18). Because of the high rate of taxation, investors shy away from the UK market and affect the entire economy (Poterba 2007, p.45). It creates a reference to the initiative stimulated to fetch more tax revenue as being a short-term plan. There shall be no more tax collection from immigrants to other countries. The Labour Party should evaluate possible effects of the administration’s decisions and not use that to criticize the government. Recommendations Following arguments raised, the UK policymakers should consider diverse recommendations on broad perspectives (Merrick 2014, p.1). Policy makers should abolish the tax system. The government should diversify the tax system to cater for revenues and not scare away investments. An example is the restoration of the Personal Allowance Tax. It is advisable to abolish the irrelevant 30, 000-Pound Non-Dom Charge. According to Young and Saltiel (2011, p.28), policy makers should consider reducing the level of capital gains tax to measures that are not harmful to the economy. Conclusion Taxation is a basic form of government revenue, whose structure influences the levels of performance of the economy. It is a both a fiscal and monetary tool to achieve desired economic outcomes. However, adjusting the tax system requires consideration of the effects it has on the economy. Raising the rates of tax for the citizens is likely to cripple the economy because it may demoralize investors. Considering that there are friendlier economies globally, the UK scene is a learning point for the negative effects resulting from raising the tax rates. High taxation is deterrent to working, which is the most dangerous aspect of economic growth. The UK administration should not adopt a policy to increase tax rate to 50%. Instead, it should focus on diversifying the tax system to ensure sustainable economic progress. Bibliography Aaron, H. J., & Gale, W. G. (1996). Economic Effects of Fundamental Tax Reform. Washington, D.C., Brookings Institution Press. British Broadcasting Cooperation (BBC). (25 January 2014). Q&A: Return of the 50p top rate of income tax? BBC. Retrieved November 30, 2014 from, http://www.bbc.com/news/business-25895480 Cribb, J., Hood, A., Joyce, R., & Phillips, D. (2013). Living Standards, Poverty and Inequality in the UK: 2013 (No. R81). IFS Reports, Institute for Fiscal Studies. Retrieved from http://www.econstor.eu/bitstream/10419/83504/1/75718278X.pdf Gravelle, J. G. (1994). The Economic Effects of Taxing Capital Income. Cambridge, Mass: MIT Press. James, M. (2009). The UK Tax System: An Introduction. London, Spiramus Press. Lockwood, B., & Manning, A. (1997). Wage Setting And The Tax System: Theory And Evidence For The U.K. London, Centre For Economic Performance. London School of Economics and Political Science. Mahr, B. (2007). Comparison of US, UK and German Corporate Income Tax Systems With Respect To Dividend Relief. München, GRIN Verlag GmbH. Merrick, J. (25 January 2014). Labour will bring back 50p income tax for top earners says Ed Balls. The Independent. Retrieved November 30, 2014 from, http://www.independent.co.uk/news/uk/politics/labour-will-bring-back-50p-income-tax-for-top-earners-says-ed-balls-9084983.html Noll, R. G., & Zimbalist, A. S. (1997). Sports, Jobs, and Taxes: The Economic Impact of Sports Teams and Stadiums. Washington D.C., Brookings Institution Press. Poterba, J. M. (2007). Tax Policy and the Economy. 21 21. Cambridge, MA, National Bureau of Economic Research. Urquhart, C. (25 January 2014) Labour will restore 50p top rate of income tax, says Ed Balls. The Guardian. Retrieved November 30, 2014 from, http://www.theguardian.com/politics/2014/jan/25/labour-50p-top-rate-income-tax-ed-balls Young, P & Saltiel, M. (2011). The Revenue and Growth Effects of Britains High Personal Taxes. Grosvenor Group (Print Services) Limited, London. Read More