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

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UK Government Restore the 50% Additional Rate of Income Tax

The Recent History of the Additional Rate of Income Tax

It is important to note, from the onset, that income tax remains the government's largest revenue source -- effectively raking in an average of 30% of the total tax collected. In essence, every individual has what is referred to as personal allowance on income tax, whereby every tax year, all incomes that do not exceed the set allowance are not taxed. All other income is subject to the various tax rates captured in several bands. In the year 2009 budget, it was announced that beginning April 2010, individuals raking in incomes exceeding £150,000 would be subject to a new 50% tax rate (HM Revenue & Customs, 2014). The previous rate, prior to the introduction of the top rate by the Labor government had been 45p. However, the incoming government reduced the top rate to 45p -- a change that took effect from 2013 April. It is important to note that all incomes that do not exceed £32,000 are, at the moment, subject to a basic tax rate of 20%. For those raking in more than £32,011 (with a ceiling of £150,000), a higher rate applies. According to the proposal to restore the 50% additional rate of income tax, 50% of incomes exceeding £150,000 (which are at present taxed at the rate of 45%) ought to be handed over to Her Majesty's Revenue and Customs (HMRC) as tax. The person fronting the said proposal is Ed Balls, a Labor Party politician.

Should the 50% Additional Rate of Income Tax Rate be Restored? Arguments for and Against Restoration

Arguments For

a) The Social Justice Argument

Those in favor of the proposed tax rate feel that some of the country's wealthiest people were enjoying huge tax discounts after the withdrawal of the top rate. In the words of Mr. Balls (as cited in Urquhart, 2014), "those with the broadest shoulders" ought to accept or embrace "a fairer share of the burden." This argument has some credence. According to a debate piece appearing in the Economist, "inequality has risen since the 1970s, as financial liberalization and lower taxes, among other things, have fuelled a rise in the numbers of the very rich" (The Economist, 2009). There are, therefore, those who feel that something should be done about this. One of those who feel that it is time that the rich were compelled to pay higher in taxes is Thomas Picketty, an economics professor at the Paris School of Economics. One of the reasons Picketty gives is political (The Economist, 2009). On this front, Picketty is of the opinion that soon, there are going to be stronger and more dramatic demands by the citizenry that the government embrace policies to correct the situation -- a desperate situation where top executives of corporations take home huge pay packages as net annual incomes; a precarious position whereby gains from globalization are unfairly shared between top executives and those who work in lower cadres. If no corrective measures are embraced, the citizens are likely, in the very near future, to "ask for much more damaging, anti-market policies" (The Economist, 2009).

b) Additional Government Revenue

There are also claims that the additional revenue the government will realize from this undertaking could be utilized to address other pressing matters of national urgency. According to a HRMC assessment done two years ago, bringing down the top rate, from 50p to 45p, had become a rather costly affair. As a matter of fact, according to the assessment, this would cost the government an estimated £100 p.a. This argument too has a factual basis. It is important to note that taxes play a critical role in the funding of government expenditure. As a matter of fact, taxation remains one of the most critical policy statements as far as the transfer of resources from the private to the public sector is concerned. Having a higher tax rate for a predetermined class of citizens -- those who earn more, and who are also likely to be serving in the private sector -- creates an enabling environment that compels the private sector to operate in conformity with the objectives as well as goals of the entire nation.

Arguments Against

a) Unfair Taxation Regime.

Does it seem fair to subject two classes of people to different taxation regimes yet hold everything else, including but not limited to costs of goods and services, constant? Do the rich have a moral or ethical obligation to cater for the welfare of those with lower incomes? These are some of the questions that pop up when taking into consideration the proposed 50% tax rate that effectively demands a larger pound of 'flesh' from those earning higher incomes.

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As some commentators have pointed out in the past, some of those to be disadvantaged by higher rates of taxation are people who took risks and worked hard for what they now earn (The Economist, 2009). For this reason, a progressive tax would amount to sheer discrimination on the basis of class. I am however convinced that a more sensible look at this would reveal that a progressive income tax rate, such as the proposed 50% tax rate, regardless of what those opposing it say, the fairest of them all. This is particularly the case given that it only demands a bigger proportion of tax from those who can afford. As Parenti (2010, p. 69) quips, "a dollar taken from someone of modest means cuts closer to the bone…"

b) The Cost of Foregone Revenues/Income.

Restoring the 50% additional rate of income tax would mean that the affected taxpayers have a reduced disposable income. This could have disastrous consequences for the country's economy. It is important to note that when a given country's tax rates are deemed too high, investors are unlikely to make new investments. Foreign investors are known to scout for countries with the most favorable tax regimes. Local investors, with their revenues cut, would find it difficult to continue investing in a country that does not offer greater returns. It is obvious that the economy is likely to suffer. Ball's proposals have already been met with huge criticism from the business community (Urquhart, 2014). Some verbatim responses to surveys have also, in the past, indicated that a 50p rate would discourage business. A respondent in a CBI-Deloitte survey (as cited in Young, and Saltiel, 2011) for instance pointed out that they were "finding it difficult to attract employees from overseas because of the 50% tax rate…"

c) Wastage of Funds

There are also those who, like Chris Edwards, the Director of Tax Policy Studies at Cato Institute, feel that the government has no moral obligation to charge higher taxes to the high-income bracket group, given that it has little to show for what it collects at present (The Economist, 2009). This is largely a political argument, in my view.

Conclusion and Assessment

Is it in order that the government raises finances that only meet the minimum public expenditure level? Times are tough and the government is in desperate need for sufficient revenue to not only reduce the deficit, but also serve the needs of a growing population. For the government to better the life of the masses, resources have to be transferred to the public sector -- with taxation being one of the best policy statements for doing so. It should be noted that I am not blind to the fact that some taxation regimes have negative consequences especially when it comes to the cost associated with foregone revenues, excess burden, etc. However, negative consequences are, almost always, associated with tax systems with poorly constitutes features. This is more so the case when the said tax systems ignore such important considerations as the tax base size as well as income verses consumption. The proposed tax system makes use of graduated tax rates, effectively taking care of the problem that would arise if the diverse economic characteristics of the masses were not taken into consideration.

In the words of Fleming (2004, p. 21), "there is some debate about what constitutes an equitable tax." As the author further points out, a good tax system ought to have some unique characteristics. Some of these include 1) equity, and 2) simplicity. In my opinion, the proposed 50% additional rate of income tax fits the bill on all two fronts. I will briefly explain. When it comes to equity, Fleming (2004) is of the opinion that a good tax system should enhance fairness -- meaning that citizens whose capacity to pay is similar ought to be treated equally. In the words of the author, "those with whose capacity to pay is greater should bear a greater burden of taxation" (Fleming, 2004, p. 21). This is exactly what the proposed tax seeks to accomplish. To be simple, a tax system as Fleming observes, ought to be easy to comprehend and understand. This is particularly the….....

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