Finance Accounting: United Kingdom's Labor Party (Essay Sample)

Finance and Accounting
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Explanation
The United Kingdom’s Labor Party intimated that it would inflate top rate of income tax by additional 50% in the event that it prevails in the next elections. This was announced by the shadow chancellor. This rate was applicable on incomes exceeding £150,000 until 2013 when this changed and the tax rate was later reduced to 45% by the government of the day. The shadow chancellor, Ed Ball, did say that in order to lessen the deficit, he would overturn the resolution reached by the coalition government. He mentioned at a conference that rich should bear part of the burden hence the decision to raise the income tax for higher earners. Latest statistics reveal that citizens earning in excess of £150,000 did pay about £10 billion in taxes for the three-year period during which time the 50% top tax rate was in effect (Fishback et al. 2012 p14). This was back in 2012 when the UK government carried out an assessment of tax return in 2012.
With high deficits; with tough economic times expected to extend into the subsequent parliament; when real incomes of for ordinary households are falling and taxes have skyrocketed, proponents of the top tax rate criticized George Osborne and David Cameron giving the rich the UK a massive tax cut. Proponents of the tax reduction asserted that the lower rates raked in more cash to the tax man as compared to the higher tax rate. In defence, Balls maintained that the inflation of the top tax rate was just another way of reducing the deficit. He said, perhaps this was why the next parliament would overturn the government’s top rate tax in a bid to reduce the deficit. A major bone of contention that arose was that reversing the unfair tax cut would favor only the richest; they make only about 1% of the population. Cutting the deficit was thus viewed as a fairer way of reducing deficit. The principal secretary to the UK treasury, Danny Alexander, mentioned that tax inflation would damage the foundations of UK’s economic recovery. The stance of the Labor party concerning taxation was viewed as inappropriate and a hypocrisy (Fishback et al 2012, p56). The government system was seen to be full of ambiguities that would make the wealthiest prone to exploitations.
The action by the government to increase capital gains tax, decrease pension’s tax relief for the richest and deal with tax avoidance was seen to raise more the wealthiest, thus making the UK more competitive (Great Britain 2012, p24). There was a unanimous concession that 50% top rate could not help achieve either of the above objectives. Tax campaigners and business leaders disparaged this declaration while employee unions supported the move. One spokesperson of such union asserted that the move to reinstate the 50% top tax rate was a sign that future labor government comprehended a taxation system that was fair for the country. Other factions were of dissimilar opinions, though. A director general, Simon Walker, believed raising the tax would hurt Labor Party’s integrity with regards to the business community. According to him, the 50% top tax rate could greatly damage UK’s claim to be viewed as a low-tax economy and an economy that reduced total tax receipts. The move was viewed as political and one that could divide voters. One organization for Fiscal Studies cautioned that the move to raise tax by 50% for the wealthiest could hurt overall economy.
A thorough and individual HMRC analysis revealed that the fundamental economic advantage is considerably lower than the original forecast. This taxation was self-defeating and even failed to pay itself, the report revealed. Sources from the Labor Party intimated that financial figures discharged by Revenue and Customs offices indicated that highest earners were taxed £9.5bn more in terms of overall income tax liabilities when the 50% additional rate was used than in earlier analyses. The Chancellor of the Exchequer, Osborne declared he would be reducing the 50% additional tax rate in 2012; he insisted that it had been unfruitful in generating the revenue forecast (Great Britain 2012, p18). Finally, general director of Institute of Economic Affairs, Mark Littlewood pointed out that reintroduction of the 50% top tax rate would be a calamity for both economic and enterprise growth. People earning in excess of £150,000 pay about a third of income tax and generate jobs and this culture should be nurtured, not eroded.
Discussion of Arguments Against Additional Tax Rate
The UK’s tax policy has undoubtedly become counter-productive; the tax rates exceed the revenue maximizing heights. This has would lead to economic damage. It is important to understand the very essence of the tax system. The function should be to generate money for the exchequer, rather than punishing the UK’s wealthiest or gaining political advantage. As a threshold policy aim, taxes should never exceed the revenue-maximizing level. Revenue maximizing charge is far different from growth-maximizing level perspective of taxation. As such, there should be a common ground among the mentioned considerations. The citizens are served best when the rates of tax are closer to lower levels in which case government reduces so as to give room for lasting and sustainable economic growth (Great Britain 2012, p29). Generally, lower rates of tax have a constructive effect on work, employment, and output as well as the eventual tax base since it provides incentives to boost these activities. Thus, inflating tax rates has a contrary effect by undermining involvement in the taxable activities.
Generally, the more taxes one pays the less they get from the taxes. A good tax system makes poor people rich as opposed to robbing the rich. Unfortunately, some politicians employ tax systems to hurt the rich even if the revenue collected is overall less. Thus, in the end everybody, including the poor suffer. Various reports suggest that the UK’s tax system hindered economic growth. The aim of progressive taxation should be to rest the greatest burden on high people paying more. At least, this makes sense especially with regards to Marginal Utility of Money theory. Consider this scenario: an additional pound to a person with £100k is less worthy than an additional pound to an individual earning median salary of £26,000 (Temple & Porter-Hudak 2005). This implies one pays a higher proportion for every 100,00th than they did the first time. For almost 25 years, the UK’s income rates of tax were kind of fixed from the failed experiment of 10% initial rate. Then the wealthy paid a secondary 40% when everyone else was paying 20%.
Everyone paying higher tax rates must hand in a tax-return and so most likely seek the services of an accountant to recommend to them the best options. This is not illegal or even contrary to legislation. If anything, it helps to guard against tax evasion. This situation depicts a scenario where one only pays money to satisfy the exchequer, but not to have an overall impact on their lives. This form of taxation is clout. In essence, the 50% top tax rate raised more money than the £3bn envisaged. Needless to say, the 50% top rate certainly generated more than had been initially intended. Dropping the rate to 45% almost undoubtedly reduced the money collected in comparison to the status quo ante; in the short-run, the status quo was raised by very negligible margins. Currently, revenue maximizing rate is in the neighborhood of 40% and 50%. A 50% top tax rate is certainly on the heading towards the downwards stop of the curve. This is as a result of incentive and investment effects. It therefore becomes unreasonable at the margin, to try to get past £150k when in essence, the government is taking over half. In the long run, many people shift their earnings to less punitive jurisdictions (Temple & Porter-Hudak 2005, p25). What does this mean? This means that soon the British subsidiaries will close down or that they will not be started in the first instance at all, in which case the economy will be hurt. Although there may be business as usual, but the truth of the matter is that the business will not be done by the wealthy people in the UK as they will be afraid of taxation. Investments will be grounded since even a tenth of earnings of say, a tenth of over £150k still mean a huge sum of money. Perhaps, it is worth to consider that most of the earning above £150k contributes a great deal to the economy (Smith et al. 2008).
Finally, the machinery by which upper side of the Laffer arc operates is by attenuating the pie, not just for the rich taxpayer, but for everyone. This scenario could get worse: most people would be willing to pay 40% but this will done as long as the people will be willing to accept it (Uberoi 2010, p15). Paying 50% would mean that anybody who pays 505% would have their instinct options. Considering this scenario, the increased taxation would be detrimental to the exchequer’s tax base, because the wealthy who are forced to pay the additional ta...