Should the UK Restore the Additional 50p Taxation Rate? Essay

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

Debate surrounding the controversial 50 pence additional rate of income tax for high income earners hit the limelight again at the beginning of this year following Shadow Chancellor ED Beals' announcement that the Labor Party intended to restore the same if it was elected to power in the 2015 general elections. Addressing journalists in January, the Shadow Chancellor argued that such a move would see the economy raise approximately £10 billion over a period of three years, which would essentially imply that i) the level of national debt would be reduced, and ii) disparities in income and wealth would be minimized through a fully-progressive tax system structured to ensure that "those with the broadest shoulders bear a fairer share of the burden" (Merrick, 2014). The Chancellor's argument and the Labor Party's proposal by extension have, however, received their fair share of criticism from several business and political leaders, among them Prime Minister David Cameron, who argued that any such policy would slow down the process of economic recovery, and would lead to higher levels of public debt in the long-term. One may then wonder - what exactly is sprawling all this debate about the top rate of income tax among political heavyweights; or rather, does the 5p rate of income tax really have as much merit as its proponents claim, or is this just another political center-ground seen by players as a way to appeal to the electorate? This text interacts with the various views presented by the opposing and proposing factions, and gives a tentative position on the issue, based purely on the relative strengths of the main arguments.

What is the 5p Additional Rate of Income Tax?

The UK taxation system subjects individuals' incomes, including interest on savings, pensions, and salaries to income tax on the basis of 'bands' -- the first £ 9,440 (which recently rose to £ 10,000) is exempt from taxation, with any income between this limit and £32,010 attracting a basic rate of 20%, that between £32,011 and £ 150,000 attracting a tax rate 40%, and anything in excess of £150,000 attracting a rate of 45% (BBC, 2014). Prior to April 2013, earnings exceeding £150,000 were taxed at a rate of 50% - the 5p rate of income tax - such that a person earning £200,000 would be taxed at 40% for the first £150,000 and an additional £25,000 for the extra £50,000, as opposed to the £22,500 they would pay under the current 45% rate. The government's decision to reduce the high-band rate from 50% to 45% in April last year was aimed at stimulating economic growth and facilitating the process of recovery. The Labor Party's plan is geared towards facilitating income redistribution by raising the high-band rate of income taxation from the current 45% to the original 50%.

Evolution of the 'Additional' Rate of Taxation in the UK

Ault and Arnold (2010) point out that politics and history have both had an influence on the UK tax system over the years. The 5p rate of income taxation hit an all-time high of 83% between 1978 and 1979, when the Labor administration was in power. In fact, as the authors point out, a supplementary tax rate of 15% was imposed on all earnings categorized under 'investment earnings', implying that the 5p tax rate could essentially rise to a marginal 98% for earnings exceeding a certain figure. This very principle of 'shared mystery' appears to be directing the current push by the Labor party for the restoration of the 5p rate of income taxation. Its critics, however, view it as more of an uninformed principle, which does not take into consideration the prevailing circumstances, and which is perhaps the reason why Mr. Balls and Mr. Ed Miliband lag so far behind George Osborne and David Cameron in public ratings related to economic competence.

When the Conservative Administration, under the leadership of Margaret Thatcher, took over leadership in 1979, the top rates of taxation were immediately reduced to 60%; and were cut even further to 40% in 1988 following the abolition of the surcharge on investment income (Ault & Arnold, 2010). The New Labor Administration, under the leadership of Gordon Brown and Tony Blair took over from the Conservative Administration in 1997, but retained the 40% rate for the better part its period in office, only adjusting the same to 50p in 2010 -- what came to be known as Labor's 'additional rate' (BBC, 2014).

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The current coalition government maintained the 50p rate until April 2013, when it reduced the same to 45p.

The 50p Rate of Income Taxation -- Good or Bad for the Economy?

What comes out clearly in this debate is that proponents of the 50p taxation rate place more emphasis on income redistribution, whereas their counterparts in the opposing faction are more concerned about wealth-creation.

Case for the 50p Taxation Rate

A large number of those in favor of the restoration of the 50p strongly believe that the current coalition government actually had no valid reason to cut the rate to 45p in the first place. Speaking in the House of Commons in April this year, for instance, the right Hon. Jonathan Edwards, member for Carmarthen East and Dinefwr Constituencies termed the government's cut on the 50p rate as "an election gimmick for the 2010 general election rather than a matter of deep principle" (Edwards, 2014, n.pag).

By reducing the tax liability of the top-most earners in the UK, Edward argued, the government went against the very slogan of 'we're in it together', which it had invented earlier on its reign as a strategy for cutting down on public spending and reducing the level of public debt. The slogan treated all citizens as equal players in the economy, and was footed on the assumption that in order to build a better future for future generations, the UK populace - both the rich and the poor -- will have to work together and bear the liability arising from the excesses of the past, in unity, as one people. Well, this, according to Hon. Edwards is not what the 50p tax cut did -- we cannot claim to be 'together in this' if we reduce the tax liability of the rich and compromise the welfare of the disadvantaged in society.

Illustration: under the 50p taxation system, an individual who earns £200, 000 bears a 40% liability for the first £150, 000, and an additional 50% liability for every pound in excess of this amount. In the end, they pay £25,000 in additional taxes to the state. Under the 45p system, however, the same individual pays £22,500. Well, it is estimated that approximately 240,000 persons in the UK earn an income of more than £150,000; and 2% of these (approximately 6000 legal persons) earn more than £2,000,000 in annual revenues. This number, multiplied by the difference (£2,500) yields revenue losses of approximately £600 million. With such huge losses, deferment and forestalling are inevitable, and unfortunately, it is the poor who bear the brunt, because they have most of their social benefits cut, as was the case when the government announced a £10 billion cut on its social protection budget in 2012, on top of the cuts that had been announced earlier on in the 2010 emergency budget. This is a perfect illustration that by reducing the tax liabilities of the rich, we are reducing our ability to provide welfare for the disadvantaged, and we ultimately are widening the rich-poor gap and making ours a largely unequal society.

Edwards argues that we reduced the rate of taxation for the rich to ensure that they have higher disposable incomes to stimulate consumption and investment in the economy, both of which had been affected by the recession; but in the process, we somehow forgot that the poor too got hit by the recession? Are we really 'in this together' if our effort to restore the economy to pre-recession levels is benefiting the rich, global multinationals handsomely, and producing little beneficial effect to the disadvantaged, who also happen to be the majority?

The trickle-down theory postulates that the re-empowerment of the financial elite in society stimulates economic growth as the income and wealth created as a result trickles down to those at the bottom of the pyramid and they too become wealthier (2012). This has, however, not been the case in the UK - rather than the wealth created by the 45p fiscal tax cut trickling down to the disadvantaged, it has been hoarded at the top, making the rich super-rich at the expense of the poor. What we have now is large-scale inequality characterized on one hand by a handful of superrich individuals who seem to think that having worked for their money, they do not deserve to pay a lot of awful tax.....

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