Coalition Parties Clash in Taxing High Earners to Boost UK Economy
Heated debates have begun UK wide regarding the state of the UK’s income tax system. It has been called by the Conservative government that the 50p tax rate bares little significance in raising revenue and in fact pushes the country’s most skilled and educated offshore.
Over recent weeks, crisis talks have been held in UK parliament as instigated by the Chancellor George Osborne for the abolishment of the 50p tax rate for high end earners. The new suggestion is to decrease the 50p income tax rate to 45p or scrap is altogether, as little revenue has been generated from enforcing the 50p rate.
The 50p income tax rate for earners in the UK receiving over ₤150,000 was first introduced at the start of 2010 and already its beneficial capacity is widely disputed in parliament.
When the 50% tax rate was first adopted it was said to directly affect around 300,000 high income earners in the UK and was expected to raise around ₤2.4 billion in extra funds within a period of 12 months. The introductory rate was widely criticized at the time for being a detrimental move affecting the confidence of investors and entrepreneurs.
| “Individuals who earn ₤150,000 can often decide where they live and work in the world and will move to a more friendly tax regime.” |
It is not surprising that the 50p rate is now in discussions of being cut altogether. When the rate was first introduced it was clear that although a small proportion of revenue could be generated, the overall effect on the economy and business arena would be harmed. Business professionals earning over the ₤150,000 income level can simply move away to avoid such high taxation. It is reported that the UK charges one of the highest income tax rates out of the top global economies and as such, it causes unfair competition.
The UK’s 50p tax rate for high end earners was recently ranked as the 7th most expensive tax rate within the top 20 economies worldwide, for people earning an average of ₤121,000 per annum.
When compared to highly favorable financial centers like Dubai where income is free from tax, the UK bares a negative foundation for anyone earning ₤150,000 or more to set up home or business. It is a clear assumption that if one can pay little or no tax on their earnings then of course it is likely that they will relocate to benefit from this, thus forcing the middle class to wealthy individuals, and businesses out of the UK. At present the UK income tax system appears to penalize the middle to high end earners on taxes ranging from 40% to 50%.
UK income tax rates 2011/2012
| Salary Band | Tax Rate |
| ₤0 – ₤35,000 | 20% |
| ₤35,001 – ₤150,000 | 40% |
| ₤150,000+ | 50% |
It is not only the UK which suffers, Italy high earners suffer significantly when it comes to being taxed on their earnings with high end earners keeping on average 54% of their total salary due to high income tax rates. Statistics from April 2011 show that Italy’s income tax is 43% on salaries over 75,000 EURO. Judging by the state of Italy’s economy it should be a warning to other countries across the globe that excessively high corporate and income tax rates will not help to lower the country’s deficit but it will push domestic and foreign investors away.
The higher the tax the more likely it is to obstruct effective economic growth. This point has been realized by the UK government, in particular by the Chancellor George Osborne. The fact that the modern markets highest earners are not only mobile and able to conduct their business from overseas, but overseas territories actively help highly skilled workers to gain residency. This means that the UK will slowly loose their most skilled and educated workers and will see the number of UK businesses relinquish.
John Hector Mackenzie, MD for a global organization based in the UK, gave his opinion on 50p tax rate and its affect on the UK economy.
“Individuals who earn ₤150,000 can often decide where they live and work in the world and will move to a more friendly tax regime.”
He added,
“The UK government should abolish the 50% level”.
It has been made evident across the board that the 50p rate does little in terms of generating a substantial and significant amount of money for the country and in fact causes more harm than good. More businesses and high earning professionals are moving offshore and fewer businesses feel confident to set up operations in the UK due to its penalty culture on those who earn a higher salary than the UK average.
A UK based small business owner, spoke of his views on the excessively high income tax rates, he said,
“The 50% tax rate is holding small businesses like mine back, there is no point in expansion.”
He continued,
“The income tax gives no incentive for people to do well and earn a decent wage, it does just the opposite in fact – you may as well be on benefits in Britain!”
On speaking about his decision to remain in the UK rather than move to a more tax friendly country, he stated,
“I am rather old school – my roots are here, I would have to sell my land which has been in the family for a long time, and then uproot my family all for income tax benefits, it just not feasible in my situation.”
The proposed eradication of the 50p rate has caused a tremendous disruption between the two coalition parties – Conservatives and Liberal Democrats. The Liberal Democrats has declared their disapproval of putting the tax decrease for the wealthy on a higher priority list than helping lower income individuals. The Lib Dems alliance to shifting the tax focus on lower earners was voiced last week, however the Conservatives are strongly for the 50p rate reduction stating that it is “without any effect on revenue”. The Conservative led coalition government has increased capital gains tax, which means the wealthy will still pay a tax on their wealth, regardless of whether the 50p is upheld or not.
Together with the scrapping of the 50p rate, a temporary cut in VAT (currently 20%) could provide the needed boost to the UK economy over the short term. The UK economy is in need of employment opportunities for both the young and graduate level workers but also those who found redundancy when the recession hit. The UK is slowly climbing back to its former credible and stable reputation but harming the entrepreneurial spirit of the country will cause a long term negative impact on the country.
The Liberal Democrats have proposed a mansion tax plan to ensure the wealthy will still be taxed more than those on lower incomes. The said mansion tax would be a replacement to the 50p income tax rate should its scrapping be approved in parliament. While the 50p abolishment will gain widespread applause from the Conservative backbenchers, the mansion tax, should it be introduced, would keep a happy medium and smooth over the current rift between the two disagreeing coalition parties. This new form of taxing the wealthy has been backed by several large corporate institutions that believe the aforementioned mansion tax to be one of the most appropriate taxing methods to replace the 50p rate.
Although the new mansion tax may help generate a larger proportion of revenue for the government, it is by far a highly unrepresentative approach of taxing. Many high earners could decide to invest their financial wealth in other areas and live in a relatively modest house while others may put the majority of their wealth into buying a large property worth millions. The mansion tax is expected to tax those who own a house valued at over ₤1m. A clear assumption can be made that those who have purchased their dream house will now be penalized for it with higher taxes, thus forcing the UK property market to fall if the wealthy decide against purchasing valuable properties. It is only over recent years that the UK property market has bounced back and the UK mansion tax could damage the property market beyond repair.
The UK economy is still suffering the aftermath of the devastating recession of 2008 and the recent England riots has helped shake the confidence of business owners and professionals with regards to their faith in the UK government and stability of the economy. In essence many of those who can afford to move abroad, whether it is for tax planning purposes or the stability of an offshore country, it is now more than ever that the UK government needs to help attract business professionals to remain and move to Britain. The aggressive UK income tax system will force the economy to accept an unfortunate future ahead of them as the country’s new generations of entrepreneurs move overseas and property markets are damaged.
It is expected that if the tax alteration goes ahead, it will not be legally scrapped until April 2013
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Category: Individual Taxation
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