HISTORY OF TAX SYSTEM IN THE UK
First I’m going to
start this essay with the basic objective of the UK tax system. The main
objective of any tax system is to raise revenues to fund government expenses.
‘’There are five main causes for taxations. Tax is used to: Raise income i.e.
to fund the activities of government; Reprice goods and services measured to be
on properly priced by the market such support for families, tobacco, alcohol,
carbon emissions; reallocate revenue and wealth; Increase representation within the independent process
because it has been found that only when an electorate and a government are
guaranteed by the common interest of tax does democratic responsibility really
work (this being a key issue in UK local government at present); and Reorganise
the economy through the process of financial policy. Before discussing further
at this point, I’m going to look at the ’The ten attributes of a good tax system’ an effective taxation system
has nine characteristics with one over-riding characteristic to which they all
contribute. An efficient tax system is: Complete – in other words, it is
comprehensive; Complete – with as few ambiguities as possible ; Comprehensible
- it is as certain as is reasonably possible; Compassionate – it takes into
account the capacity to pay; Compact – it is written as straight forwardly as
possible; Compliant with human rights; Compensatory – it is perceived as fair and redistributes income
and wealth as necessary to achieve this aim; Complementary to social objectives; Computable
- the liability can be calculated with reasonable accuracy; All of which facilitate the chance that it will be: Competently managed. In combination we trust that
these are key qualities of a good tax system.’’([i]) now I’m
going to discussing about UK tax system. As we know, UK Economy is developed economy. Tax is not a choice
within advanced economy; it is a fundamental part of it. An established economy
is permanently a mixed economy; the state and private sector do, without exemption,
cooperate in such economies to create the situation in which individual, public,
political and general goals are met. This point is strained: economic development
is an element in attaining these goals, but it is not the only way in which
they are realized. As such any policy on development has to respect other determinations
for taxation as well. This is clear from the characteristics of a respectable
tax system. It should also be noted that
tax can only deliver a part of the answer to any economic problems that the UK
faces: tax is only paid when economic income that can be located and measured
to tax is produced. Tax policy by itself cannot generate an environment in
which supplementary government income of the scale needed to resolve the level
of unemployment currently suffered in the UK will be produced. At best tax
policy can only help in doing so. Other rules will be needed as well. That
said, there can be no hesitation that growth in employment is dynamic to the retrieval
of the UK economy and to the rising of the revenues needed to clear the
government’s shortfall and if tax is to play a part in this procedure it must
encourage the formation of the most jobs possible for the least government expenditure
achievable. The
amount of income raised up is determined to a huge amount by tax bases and tax
rates. It is also a purpose of a range of measures – special tax rates,
exemptions, deductions, rebates, deferrals and credits – that affect the level
and distribution of tax. These measures are sometimes called ‘’tax
preferences.’’ They have an impact on Government revenue (i.e. they have a
cost) and reveal the policy selections of the Government. Tax preferences may
be observed as subsidy expenses to preferred taxpayer such inherent payments
are stated to as ‘’ tax expenditure’’ and it is often maintained that they
should look as expenditure items in Budget. In this context, the basic concern is not one
of tax strategy but one productivity and clearness – programme planning needs
that the policy objectives be addressed clearly; and programme budgeting calls
for attachment of such outlays under their particular programme headings. Tax
expenditures are spending programmes introduced in the tax status.([ii])
Governments of different parties will have dissimilar opinions of what establishes
prosperity and different policies to follow it. The use of taxation should not be excluded as a means to this end. However, the unselective
use of taxation to attain broader policy goals may raise the difficulty of the
system and be counterproductive.
Government should be cautious about using tax policy as auxiliary for direct
policy procedures; doing so only after sensibly analysis shows it to be the
most operative tool.
Now I’m going to discuss last government and
current coalition government tax strategies.
All main
political parties have one main strategy to tackling the budget deficit. Labour
Government’s strategies in the 2009 Pre-Budget Report for rising tax revenues
would see an important percentage of the increase in taxes – around £11.1
billion in 2011-12 and £14.3 billion in 2012-13 – dropping on labour.
Announcements to date recommend an increase in tax on revenue via the new 50p
top rate and drawing of the personal allowance for earnings over £100,000, and on
employment via a 1 per cent increase in National Insurance Contributions
(NIC’s). Relief on pension contributions is also being constrained for those on
revenues over £150,000. And after budget 2009 actual results are as follows:
Central
government account:
Not:
seasonally adjusted: £billions
Current
receipts
|
April(2010/11)
|
January
(2009/10)
|
Differences
|
Taxes
on production([iii])
|
158.2
|
140.3
|
17.9
|
Taxes
on income and wealth
|
161.1
|
148.2
|
12.9
|
Other
taxes
|
10.7
|
10.1
|
0.6
|
Compulsory
social contributions
|
78.5
|
77.0
|
1.6
|
Interest
and dividends
|
4.7
|
5.4
|
-0.8
|
Other
receipts
|
7.2
|
6.7
|
0.5
|
420.4
|
387.7
|
32.7
|
Current
expenditure:
interest
|
36.7
|
24.9
|
11.9
|
Net
social benefits
|
145.8
|
140.5
|
5.3
|
Other
current expenditure
|
320.6
|
309.2
|
11.4
|
Total
current expenditure
|
503.1
|
474.6
|
8.5
|
Depreciation
|
-6.0
|
-5.5
|
-0.5
|
Current budget
|
-88.7
|
-92.4
|
3.7
|
Investment([v])
|
32.3
|
43.7
|
-11.4
|
Depreciation
|
6.0
|
5.5
|
0.5
|
Net investment
|
26.3
|
38.3
|
-11.9
|
Net borrowings
|
115.1
|
130.7
|
-15.60
|
(Source:
Office for National Statistics)
If we talk about
the coalition government; first budget delivered by George Osborne of the new
Conservative-Liberal Democrat coalition government on 22-06-2010. Some of the
key points in 2010 budget were as follows: Financial consolidation actions
value £40 billion a year by 2014/15, in accumulation to those declared by the
previous government; The new “financial mandate” – the Government’s objective
for fiscal strategy; An increase in VAT to 20% from January 2011; An escalation
in the income tax personal allowance to £7,475 from April 2011; A new charge on
banks’ balance sheets; An escalation in the rate of capital gains tax for
higher rate taxpayers from 18% to 28%;A number of improvements to corporation
tax including reducing the main rate from 28% to 24% by April 2014; A two year
pay restriction for public sector workers receiving over £21,000; £11 billion
savings from welfare reform by 2014/15; A restriction in the level of child
benefit for three years to fund escalations in Child Tax Credit; An increase in
the Basic State Pension by the highest of earnings, prices or 2.5% from April
2011;([vi]) .The
Budget set out a number of expenditure cuts and tax increases over a five year
period to address the UK’s large budget deficit. By 2014/15, 80% of the fiscal consolidation
measures set out in the Budget will have been delivered through cuts in
spending and 20% by tax increases. The
Budget also set out the Government’s monetary strategy objectives (its “fiscal
mandate”). It is the first Budget to use
the economic and fiscal forecasts prepared by the independent Office for Budget
Responsibility (OBR). The Budget contained the revised financial predictions of
the OBR. The new OBR predictions for
growth in 2010 and 2011 are lower than those published by the OBR on 14 June. In
2013 and 2014, the new growth forecast is higher.([vii])
Actual results are as follows for 2010-11.
Before start new thing in this essay I can say
one thing current and last government’s objectives are and were same to reduce
the deficit and try to get more receipts than expenditures. There are a number of very substantial anomalies
in the UK tax system. I’m going to discuss some of that are as follows; The reverting nature of the overall tax system; The returning nature of local taxation; The favouritism in favour of big companies now being built into
the tax system; The persistence of the
availability of the domicile rule, which we believe wholly unsuitable as it
allows discernment on the basis of nationwide origin within the tax system;
The comparative ease with which those with adequate means can
misuse the UK tax residence rules remains a matter of significant concern; The tax system still seriously favours capital gains over revenue,
an irregularity that only Nigel Lawson successfully spoke; The taxation of labour revenue remains at much higher rates than
the taxation of revenue from capital due to the influence of national insurance
charges on the previous but not on the latter: this is an anomaly that appears
long unsettled to be addressed; Ingesting is now taxed at the
same rate as income – and ingesting taxes will for many households now form a
greater part of their tax load than do direct taxes. This rejects those in this
situation the chance to save, invest and create prospect that is available to
those with wealth who do not need to spend all they earn on the basic needs of
current living. This damage to equality of access to the understanding of the
possible all people in our society latently enjoy is a matter of thoughtful
concern and should be addressed in a fair tax system; ([viii])
The
current financial recession has been reflected in a substantial fall in tax
revenues in the UK. Total taxes were £21 billion less in 2008-09 than in
2007-08, equivalent to a fall of 2 per cent of GDP.([ix])Similar
slopes in receipts can be seen during previous recessions in 1974-75, 1980-81
and 1991-92. Falls in tax income during a slump are a feature of the programmed
stabilisers that help to charming the economy. They reflect a number of aspects
– increases in unemployment mean that less revenue is collected from income
tax, business profits are cuddled reducing corporation tax and people spend
less resulting in a fall in consumption tax. Following the recession of the
early 1990s, it took five years for revenues to return to pre-recession levels. ([x])The Treasury approximations a similar
trend in the current recession, forecasting that receipts will pick up in
2010-11 and continue to rise to once more reach factually high complete levels
within five years of the start of the downturn.([xi]) According to Reform briefing
note Budget 2010’’Deficit reduction plan under current Government is as follow,
Alistair Darling has promised to halve public sector net borrowing over the
four years to 2013-14, from £176 billion to £96 billion. The 2009 Pre-Budget
Report showed that public expenditure is scheduled to be £58 billion lower by
2013-14. The rest of the £80 billion decrease in the deficit would come from
tax increases of £22 billion. The Conservative Party has said that the divided
between tax increases and public spending should be around 20:80. This would
mean that a Conservative Government would increase taxes by around £16 billion
and changed expenditure by about £64 billion by 2013-14.The Liberal Democrats
have claimed that the bulk of the decrease must come on the spending side.
Vince Cable has said that the Liberal Democrats have recognized £10 billion
more in spending cuts than the Government. On this estimate their tax to
spending ratio for the economic shrinking would be around 15:85.Reform argues
that the economic tightening should go further, proposing that borrowing be
reduced to 4.5 per cent by 2013-14 and that the load of adjustment should be
borne by tax increases and expenditure reductions in the ratio of 12.5:87.5.
This suggestion would see £1 raised from tax rises for every £7 saved from
cutting expenditure,([xii]) following the Canadian rule of thumb
from the 1990s ([xiii])’’ These approximations of the return
to fiscal growth and speed of recovery in revenues are likely to be excessively
optimistic.([xiv])
The
impact of the recession in taxation: Table No.1
2007-08,billions
(real prices)
|
2008-09,billions
(real prices)
|
Changes
,billions
|
||
Income tax
|
£155.5
|
£153.4
|
-£2.1
|
-1.4
|
Corporation
tax
|
£47.5
|
£43.1
|
-£4.4
|
-9.3
|
Stamp duty
|
£14.4
|
£8.0
|
-£6.4
|
-44.6
|
Inheritance
tax
|
£4.0
|
£2.9
|
-£1.1
|
-27.4
|
Capital gains
tax
|
£5.4
|
£7.9
|
+£2.5
|
+45.5
|
VAT
|
£82.6
|
£78.4
|
-£4.2
|
2 -5.1
|
There is a might be
better plan better plan for current Government; according to Reform committee that the Parties’ plans are
not motivated enough in terms of the speed and scale of the economic
contraction’’. Failure to sufficiently constrict financial policy will
destruction confidence in the UK’s economic policy structure, contribute to
higher long-term interest rates and currency unpredictability, and weaken
recovery.([xvi])
I think that borrowing should be reduced to 4.5% by 2013-14, and below that in
later years. It is also important that
taxes do not rise too much as this would obstruct off fiscal recapture. I think
on the basis of the Reform committee, assessments that the load of adjustment
should be borne by tax rises and spending reductions in a ratio of 12.5:87.5.
‘’Reform’s suggestion would see £1 raised from tax increases for every £7 saved
from cutting expenditure. This rule of thumb follows the Canadian example of
the mid-1990s. The 1995 Budget included CA$7 in spending decreases for every
CA$1 increase in tax income. ‘’ As the Minister of Finance at the time, Paul
Martin, noted, the fact that the government cut back their own doings rather
than putting the load on taxpayers played a key role in creating support for
the process of reinstating the public finances.([xvii])
The consequence was that Canada’s budget deficit – which was successively at
9.1 per cent of GDP – was cut to zero within three years and public debt – at
70 per cent of GDP – was cut by a third in five years.
Now I’m going to
discuss about some alterations should be made in UK tax system to achieve
objectives. According to my research has shown that about £38 billion a year of
funding was set to pension contributions in the UK in 2007/08. I note that
fresh limits on pension contributions and the financial decline may have
changed this situation slightly but we do firstly question whether this level
of funding can still be acceptable when other elements of government spending
are subject to substantial cuts and secondly question whether the government
might take more controls to straight the resulting use of the reserves in
question to improve employment opportunities and the suitable for growth. I
have faith in that significant resources might be redirected to activity that
would generate employment if such involvement was considered.([xviii]) It has long been renowned
that small business is the biggest machine for growth in the UK economy. This recommends
that any tax benefit to be given to business to boost growth should be directed
on inspiring the growth of small enterprises and the creation of new employment
openings in this sector, which often have the lowest cost of job creation. This
is not, however, supported by current taxation policies where a number of
trends are evolving as demonstrated by research we have undertaken on effective
tax rates. By implementation of these and similar procedures i believe
that significant tax revenues needed to firstly avoid cuts and secondly arouse
growth can be higher from within and beyond the UK economy.([xix])
Conclusion:
Britain's tax
system has rotated out of self-governing control and become separate from the
Principles of
good revenue rising. It is run increasingly on lines that suit the Suitability
of the Capital, the Inland Revenue and Customs and Excise, rather than those of
the taxpayers. This tendency, apparent under both recent Governments, is
creating huge complication and needless costs. It falsifies business decision
making and executes growing loads on ordinary people. Almost everyone in the
country is caught by failures in the system: employees whose incomes have tax
deducted at source, the increasing numbers of self-employed and higher-rate taxpayers
effecting self-assessment forms, pensioners with savings and every kind of
business person. Small firms with low turnover limits and invisible taxpayers
are most susceptible to the system's shortcomings. Yet it is possible for
Governments to increase money in ways that reduce the cost, time and difficulty
of calculating and handing over tax. There has been an on-going policy to
transmission what had previously been Government meanings to the taxpayer, for
example by way of self-assessment of revenue and commercial taxes. And support
small business to increase job opportunities.
References:
[i]- TUC. (2010-11). The principles of tax policy. Available:
http://www.publications.parliament.uk/pa/cm201011/cmselect/cmtreasy/memo/taxpolicy/m39.htm.
Last accessed 23-04-2011.
[ii] - TUC. (2009). Revenue foregone under
the Central tax system , financial years 2010 and 2011. Available:
http://indiabudget.nic.in/ub2011-12/statrevfor/annex12.pdf. Last accessed
22-04-2011.
[iii]
- See table PSF3 for details of VAT and income tax
[iv] -
This definition of current receipts is the one used in HM Treasury publications
and includes taxes
on capital (Inheritance tax), which in ESA95 are in the
capital account
[v] - .
Investment is capital formation, plus net acquisition of land, and net payments
of investment
grants, less sales of capital assets.
[vi] - Antony Seely and Dominic
Web. (23 June 2010). June 2010 Budget:summary.Available:
http://www.parliament.uk/briefingpapers/commons/lib/research/briefings/snep-05605.pdf.
Last accessed 19-04-2011.
[vii]
- ale Bassett Andrew,
Haldenby Patrick, Nolan Lucy, Parsons. (march-2010). Fixing the UK’s tax
system. Available:
http://www.reform.co.uk/LinkClick.aspx?fileticket=50uB0ZZ3J00%3D&tabid=118.
Last accessed 19-04-2011.
[viii]
- TUC. (2010-11). The principles of tax
policy. Available:
http://www.publications.parliament.uk/pa/cm201011/cmselect/cmtreasy/memo/taxpolicy/m39.htm.
Last accessed 25-03-2011.
[ix] -
HM Treasury (2010), Public finances databank, January.
[x] - Dale Bassett, Andrew
Haldenby, Patrick, Nolan Lucy, Parsons,. (march-2010). Reality check: Fixing
the UK’s tax system. Available: http://www.reform.co.uk/LinkClick.aspx?fileticket=50uB0ZZ3J00%3D&tabid=118.
Last accessed 18-04-2011.
[xi] -
HM Treasury (2009), Pre-Budget Report 2009: Securing the recovery: growth and
opportunity.
[xii]
- See for example, Standard & Poor’s (2009), Global Credit Portal Ratings
Direct: United Kingdom, p. 14.,
[xiii]
- Dale Bassett, Andrew Haldenby, Patrick, Nolan Lucy, Parsons,.
(march-2010). Reality check: Fixing
the UK’s tax system. Available:
http://www.reform.co.uk/LinkClick.aspx?fileticket=50uB0ZZ3J00%3D&tabid=118.
Last accessed 18-04-2011. p.5
[xiv]
- The effect of the economic downturn on tax revenues, Source: HM Treasury
(2010), Public finances databank, January.
[xv] -
The effect of the economic downturn on tax revenues, Source: HM Treasury
(2010), Public finances databank, January
[xvi]
- Besley, T. et al. (2010), “UK economy cries out for credible rescue plan”,
The Sunday Times, 14 February
[xvii]
- Martin, P. (1996), “The Canadian Experience in Reducing Budget Deficits and
Debt”, Economic Review, Quarter One, Federal Reserve Bank of Kansas City, pp.
11- 25.
[xix]
-Tuc, publications and record.
(2010-11). The principles of tax policy. Available:
http://www.publications.parliament.uk/pa/cm201011/cmselect/cmtreasy/memo/taxpolicy/m39.htm.
Last accessed 25-April-2011.
