Uk's 50p Additional Rate of Income Tax Essay

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UK Government Restore the 50% Additional Rate of Income Tax?

The United Kingdom has developed to become one the highest taxed nations across the globe despite impaired competitiveness and stifled economic growth. Unlike most OECD countries that have lessened their tax burdens since 1997, UK taxation has increased, which has resulted in reduced competitiveness of the country's position as a low tax regime. The other characteristics of UK taxation include forcing taxpayers into higher rate tax bands, which enforces higher tax rates for more people. However, in the past few years, there have been debates and controversies on whether the United Kingdom government should restore the 50% additional rate of income tax. This debate or controversy has been characterized with arguments and counter-arguments in favor and against such a move respectively.

Recent History of the Additional Rate of Income Tax

As previously mentioned, the United Kingdom is ranked among the highest tax countries throughout the globe (Young & Saltiel, 2011). The high taxation in the country is partly attributed to impaired competitiveness and stifled economic growth that nation continues to experience. The United Kingdom is suffering from a 50% marginal tax rate which is largely considered to have been enforced without economic purpose even with the architects of this policy. According to financial analysts, the policy was set for failure in 2011 because of its role in contributing to the country's flat economic growth for a decade and billions of pounds of lost revenue. Generally, taxation in the United Kingdom has experienced tremendous changes from time to time.

In the 2009 budget, several tax increases were announced by Alistair Darling, the then Chancellor, in attempts to generate more than £6 billion by 2012. These increases were also geared towards securing the country's economic future and providing assistance to people when necessary. Some of these changes include increases in the rate of indirect taxes and changes to income tax through the introduction of a new 50% rate on incomes above £150,000. The introduction of the 50% additional rate of income tax was primarily part of the coalition Government's fiscal policy toward cutting the deficit.

The introduction of the new 50p rate on income tax dominated reactions to the 2009 financial year budget because of its consideration as a significant change in the approach by the Labor Government to tax the wealthy (Seely, 2014). These concerns were also characterized by huge discussions on whether these significant changes would generate as much as the Government expected i.e. £1.3 billion in 2010-2011 financial year that would in turn increase to £3.05 billion in the successive financial year.

Despite its objective towards improving the United Kingdom's economy, the additional 50p rate of income tax attracted considerable negative comments and controversies from various stakeholders and the public. First, it was argued that even though this rate had a significant symbolic value, the anticipated revenue from its implementation would be too small given the context of the expanding size of the public deficit. In essence, while the 50p rate would raise approximately £7 billion at best, reducing the deficit to more manageable levels would need a protracted duration of doubtfully high growth. Secondly, while the attempt was lauded as commendable in efforts to share the pain, it would not accomplish much to lessen the increasing gap in the public finances since it was not mixed with initiatives on capital or property. However, opinion polls that were carried out after the announcement of the Budget in 2009 demonstrated widespread support for the introduction of the new 50% additional rate of income tax by the public.

The implementation of this new measure was marred with huge concerns and devastating effects that culminated in reduction of the rate to 45p. One of these concerns was the tendency by companies to pay their employees early in order to miss the new 50% additional rate of income tax. The other concerns were the harshness of the then economic recession and ongoing reduction in the public finances. In March 2012, the department of finance had found considerable evidence that this new rate of income tax had generated huge distortions. This resulted in recommendations that the rate should be reduced to 45% whose cost would be relatively minimal as reported by the Office of Budget Responsibility. These efforts culminated in the reduction of this additional rate of income tax from 50% to 45%.

Arguments in Support of the New Rate

In the past few years, there have been suggestions for the re-introduction of the 50% additional rate of income tax. One of the factors contributing to this consideration was claims that the coalition Government made an unjustifiable and widely unfair decision to lessen the rate of income tax from 50p to 45p since it benefits people with an income of over £150,000.

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Some financial experts argue that the government prematurely removed the additional 50p rate of income tax, which should be re-introduced and its impact analyzed. The suggestion for the re-introduction of this additional rate has attracted huge debates and controversies since the beginning of the year that are characterized by arguments and counter-arguments. Some of the arguments raised in favor of the 50% additional rate of income tax include

Reducing the Deficit

The first argument raised in support of introducing this rate is the need to lessen the huge deficit for the country. Proponents of this move argue that lessening the deficit requires reversing the decision made by the coalition to lessen the rate to 45% (Urquhart, 2014). In this case, the introduction of the 50% rate would help lessen the deficit by ensuring that the country's top earners share a fair burden in reducing budget deficits. In the midst of sky-rocketing deficit and tough economic times, the UK government cannot allow wealthy people in the country to have high tax cut. This argument was the basis of the introduction of this tax rate in 2009 when the country had huge deficits. As previously mentioned, the 50% additional tax rate of income tax was initially proposed and implemented based on expectations that it would help lessen the country's deficit. The proponents of the rate argue that enforcing the move would help in lessening the deficits and deal with some of the major challenges the country is experiencing in relation to economic growth.

Fairer Share of the Burden

Secondly, this rate is supported on the premise that it could contribute to a fairer share of the burden among the UK population. As the United Kingdom economy continues to recover and experience gradual growth, it is vital to take additional measures in order to address economic challenges. These additional steps to enhance economic growth would require ensuring that the population shares a fairer burden. Therefore, people who earn more or have gained the most should contribute more rather than having huge tax cuts than others. This essentially implies that implementing this rate would demonstrate the Labour government's understanding of the need for a fairer taxation system.

Generating More Money

The restoration of the 50% additional rate of income tax by the UK government is also supported because it would help the government to raise more money. It is estimated that this move would help the Labour Government to generate an extra £10 billion in tax than previously anticipated in the 3-year period when the rate was initially charged (Goodley, 2014). Nonetheless, according to Treasury officials, the additional £10 billion would not necessary come from the establishment of the 50% rate but from the increase in the number of people who earn higher salaries during this period than previously anticipated. Based on expectations that restoration of this rate would help generate an extra £10 billion following the restoration of the 50p rate, the move will help the United Kingdom restore its hurt economic credibility.

Counter-Arguments in Opposition of the New Rate

The announcement of plans to restore the 50p extra rate of income tax has also generated counter-arguments against its implementation. While unions have supported this plan, business leaders and tax campaigners have been on the forefront of opposition against it for various reasons. Some of the counter-arguments raised by these opponents as well as other opponents include the following

Potential Disastrous Effect

One of the arguments raised by opponents against the restoration of the 50p rate of income tax in the United Kingdom is its potential disastrous effect on the country's economy. Based on findings of some assessments, the restoration of this rate is not a suitable place to start, fund and grow a business, which would in turn become a disaster (Merrick, 2014). Therefore, the 50p rate would be disastrous for enterprise and economic growth in the United Kingdom. Actually, the initial reduction of this rate to 45p was fueled by the disastrous effects it generated on the UK economy. These effects emerge from the fact that it is not an appropriate means for taxing wealthy people and the fact that it discourages people from bringing their businesses to the United Kingdom.….....

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