Should the United Kingdom Government Restore the 50 Percent Additional Rate of Income Tax - Essay Example

Should the United Kingdom Government Restore the 50% additional Rate of Income Tax? Introduction The taxation in the UK mainly involves payments to two levels of government, which include the local government and the central government. Revenue for the central government comes from National Insurance contributions, income tax, VAT, fuel duty, and corporation tax. Revenue for the local government comes from grants, business rates in Britain, and council tax such as funds from parking tax. In fact, in the year 2008, the entire tax revenue for the government was 36.8% of the sum revenue of the G.D.P. Nonetheless, it would be worth noting that the British income tax has transformed throughout the years. Originally, tax rates were equally spread the different class groups in the UK. Nobody was officially entitled to any greater tax or tax-cuts. The major changes were incorporated in Corporation and Income Taxes Act 1970. Thereafter, several other changes were made in the tax regime of England. By 1940, many people were required to pay the 50% top tax rate. They were about 750,000 people at the time. The top tax rate was subsequently abridged from 83% to 60. The basic rate would also cut the tax rates. Subsequent governments condensed this basic rate further, up to 20% by 2007. In nutshell, the additional tax has raised many questions than answers. It has brought about political differences and has been a debate among the major political opponents in the USA. Explanation With high deficits, tough economic times expected to extend into the subsequent parliament, and when real incomes of for ordinary households are falling and taxes have skyrocketed, proponents of the top tax rate criticized George Osborne and David Cameron thus giving the rich in the UK a massive tax cut (Young & Saltiel, 2011, p.8). Proponents of the tax reduction asserted that the lower rates raked in more cash to the taxman as compared to the higher tax rate. In defense, Balls maintained that the inflation of the top tax rate was just another way of reducing the deficit. He said that this was why the next parliament would overturn the government’s top rate tax in a bid to reduce the deficit. A major cause of disagreement that arose was that reversing the unfair tax cut would favor only the richest people because they make only about 1% of the population. Cutting the deficit was thus viewed as a fairer way of reducing deficit. The principal secretary to the UK treasury, Danny Alexander, mentioned that tax inflation would damage the foundations of UK’s economic recovery. The stance of the Labor party concerning taxation was viewed as inappropriate and a hypocrisy (Fishback et al, 2012, p.56). The government system was seen to be full of ambiguities that would make the wealthiest prone to exploitations. The action taken by the government to increase capital gains tax, decrease pension’s tax relief for the richest people, and deal with tax avoidance was seen as a means of raising the wealthiest people, which in turn, makes the UK more competitive (Great Britain, 2012, p.24). There was a unanimous concession that 50% top rate could not help achieve either of the above objectives. Tax campaigners and business leaders disparaged this declaration while employee unions supported the move. One spokesperson of such union asserted that the move to reinstate the 50% top tax rate was a sign that future labor government will comprehend a taxation system that was fair for the country. However, other factions were of dissimilar opinions. A director general, Simon Walker, believed that raising the tax would hurt Labor Party’s integrity concerning the business community. He said that 50% top tax rate could greatly damage UK’s claim to be viewed as a low-tax economy and an economy that reduced total tax receipts. The move was viewed as political and one that could divide voters. One organization for Fiscal Studies cautioned that the move to raise tax by 50% for the wealthiest could hurt overall economy (Young & Saltiel, 2011, p.26). Discussion of Arguments against Additional Tax Rate The UK’s tax policy has undoubtedly become counter-productive. For instance, the tax rates exceed the revenue maximizing heights that leads to economic damage. It is important to understand the essence of the tax system. The function should be to generate money for the exchequer, rather than punishing the UK’s wealthiest or gaining political advantage. As a threshold policy aim, taxes should never exceed the revenue-maximizing level. This is because revenue-maximizing charge is far different from growth-maximizing level perspective of taxation. As such, there should be a common ground among the mentioned considerations. Citizens are served best when the rates of tax are closer to lower levels when the government gives room for lasting and sustainable economic growth (Great Britain, 2012, p.29). Generally, lower rates of tax have a constructive effect on work, employment, and output as well as the eventual tax base since it provides incentives to boost these activities. Thus, inflating tax rates has a contrary effect of undermining involvement in the taxable activities. Generally, the more taxes one pays, the less they get from the taxes. A good tax system makes poor people rich as opposed to robbing the rich. Unfortunately, some politicians employ tax systems to hurt the rich even if the revenue collected is overall less. Therefore, everybody including the poor suffer in the end. Various reports suggest that the UK’s tax system hindered economic growth. The aim of progressive taxation should be to rest the greatest burden on high people paying more. At least, this makes sense especially with respect to Marginal Utility of Money theory. For instance, consider this scenario: an additional pound to a person with £100k is less worthy than an additional pound to an individual earning median salary of £26,000 (Temple & Porter-Hudak, 2005, p.67). This implies that an individual pays a higher proportion for every 100th than they did the first time. For almost 25 years, the UK’s income rates of tax were rather fixed from the failed experiment of 10% initial rate. Then the wealthy paid a secondary 40% when everyone else was paying 20%. Everyone paying higher tax rates must hand in a tax return; therefore, this most likely seeks the services of an accountant to recommend the best options. This is not illegal or even contrary to legislation. If anything, it helps to guard against tax evasion. This situation depicts a scenario where an individual only pays money to satisfy the exchequer, but not to have an overall impact on their lives (Young & Saltiel, 2011, p.25). This form of taxation is influential. In essence, the 50% top tax rate raised more money than the £3bn envisaged. The 50% top rate certainly generated more than had been initially intended (Young & Saltiel, 2011, p.24). Dropping the rate to 45% almost undoubtedly reduced the money collected in comparison to the status quo ante. In the short-run, the status quo was raised by very negligible margins. Currently, revenue-maximizing rate is in the neighborhood of 40% and 50%. A 50% top tax rate is certainly heading towards the downwards stop of the curve. This is because of incentive and investment effects. It, therefore, becomes unreasonable at the margin, to try to get past £150k when in essence, the government is taking over half. In the end, many people shift their earnings to less punitive jurisdictions (Temple & Porter-Hudak, 2005, p.25). What does this mean? This means that soon the British subsidiaries will close down or that they will not be started in the first instance at all, in which case the economy will be hurt. Although there may be business as usual, the truth of the matter is that the wealthy people in the UK will not do the business as they will be afraid of taxation. Investments will be grounded since even a tenth of earnings of say, a tenth of over £150 000 still mean a huge sum of money. Perhaps, it is worth to consider that most of the earning above £150 000 contributes a great deal to the economy (Smith et al, 2008). Finally, the machinery by which upper side of the Laffer arc operates is by attenuating the pie, not just for the rich taxpayer, but also for everyone. This scenario could get worse since most people will be willing to pay 40%, but this will be done as long as the people will be willing to accept it (Uberoi, 2010, p.15). Paying 50% would mean that anybody who pays 505% would have their instinct options. Considering this scenario, the increased taxation would be detrimental to the exchequer’s tax base because the wealthy who are forced to pay the additional taxes will feel vindicated. However, these people are in essence angry about the high taxation. In essence, what does this really imply? A government that does not sympathize with anyone who earns £250 000 annually does not have mercy for anyone who deposits a cheque of £92,627 (39%) to pay for teachers, doctors, and nurses. However, a person may be duped that they actually pay 42%. To imagine that this is before VAT and other taxes, the picture can only be gloomier (Leibrecht & Hochgatterer, 2012, p.26). In a nutshell, the attempt by the Labor Party or whatever sources to increase tax will only damage the economy and international reputation. This will bring their economic credibility to task and even the voters will likely not ascribe to these ideals. Taxation should favor everyone and should help bridge deficits (Snape, 2011, p.32). Recommendations and Conclusions Every perspective of the case has been discussed. The Labor Party Alliance is a benefactor of 50% additional tax rate. This is because the politicians have since stated that this was created for political gains. However, many schools of thought, drawn from various financial and audit bodies show that the UK’s national economy is on the brinks of collapse. What is more, there will be decreased economic growth rates and public revenues. The tax policy ought to be prompt reversed. In doing so, the UK will not only be a great investment destination, but also a home for financial creation. Investment initiatives ought to be encouraged by the government. The Britain’s tax rates are uncompetitive in comparison to other nations. Out of the 86 countries sampled, the UK is ranked 83 out of 86 countries. Global business influential leaders are unreceptive to the Britain’s tax system, individual taxes to be specific, and this scenario affects both individual location decisions and company investment decisions. There is a high likelihood that investors might emigrate from the Britain’s finance industry and this is much likely if the 50% additional tax remains effective. In view of the public opinion, the extra 50% tax should be immediately scrapped. This is because more money will be lost in revenue. There needs to be reinstatement of personal allowances presently phased out, and which is in the neighborhood of £100,000 and £115,000. The rate should be reduced, and at the same time, the capital gains should be decreased and high-income earners should be encouraged to invest by at least applying lower taxes. A thorough and individual HMRC analysis revealed that the fundamental economic advantage is considerably lower than the original forecast. The report revealed that this taxation was self-defeating and even failed to pay itself. Sources from the Labor Party intimated that financial figures discharged by Revenue and Customs offices indicated that highest earners were taxed £9.5 billion more in terms of overall income tax liabilities when the 50% additional rate was used than in previous analyses. The Chancellor of the Exchequer, Osborne, declared that he would be reducing the 50% additional tax rate in 2012. He insisted that it had been unfruitful in generating the revenue forecast. Finally, general director of Institute of Economic Affairs, Mark Littlewood, pointed out that the reintroduction of the 50% top tax rate would be a calamity for both economic and enterprise growth. People earning in excess of £150,000 pays about a third of income tax and generate jobs and this culture should be nurtured, but not eroded. Reference List Fishback, P. V. M., Kachanovskaya, V., & National Bureau of Economic Research, 2010, In search of the multiplier for federal spending in the states during the New Deal. Cambridge, Mass: National Bureau of Economic Research. Great Britain, 2012, Budget 2012. London: The Stationery Office. Great Britain, 2012, Office for Budget Responsibility: Economic and fiscal outlook March 2012. London: The Stationery Office. Leibrecht, M., & Hochgatterer, C, September, 01, 2012, Tax Competition as a Cause of Falling Corporate Income Tax Rates: A Survey of Empirical Literature. Journal of Economic Surveys, 26, 4, 616-648. Smith, N. B., Martin, D., Kay, L., Evans, N., & Policy Exchange (Firm), 2008, The cost of complexity: How Britains tax system strangles the economy and reduces British competitiveness. London: Policy Exchange. Snape, J., 2011, The political economy of corporation tax: Theory, values and law reform. Oxford: Hart Pub. Temple, J. A., & Porter-Hudak, S, March 2005, Preferences for State Tax and Spending Policies: Evidence from Survey Data on the Role of Income. Economics & Politics, 7, 1, 43-58. Uberoi, V, 2010, Options for Britain: Cross cutting policy issues: changes and challenges. Chichester, U.K: Wiley-Blackwell in association with the political quarterly. Young Peter & Saltiel Miles. March 2011. The Revenue and Growth Effects of Britains High Personal Taxes: London: Adam Smith Institute, 8-9, 23-26. Read More