1. 1 Introduction of the UK tax system There is a very long time before British tax becomes what it is now, which can be traced back to Ancient times when UK was a part of the Roman Empire. The uniform land tax in 1692 is the basis to the current British tax system; at that time, the land tax is a kind of direct tax and is the main source of government revenue. Before the end of 18th century in British, William Pitt announced income tax to cover the expenses on weapons in the preparation for the Napoleonic Wars. Initially, the tax rate was around 1/120 of the income above ? 60 and the rate increased to 1/10 of income above ? 200.
In the 20th century, income tax is the main resource for UK government; in the mean time, indirect taxes also became more important through the century. In 1965, the corporation tax and the capital gains tax were introduced, and in 1984 the capital transfer tax was replaced by inheritance tax. Currently, the taxation system in the UK can be mainly categorized as personal tax, including income tax, inheritance tax and council tax, sales taxes and duties, including value added tax, excise duties, stamp duty and motoring taxation, business and personal taxes, including national insurance contributions and capital gains tax and business taxes.
As a constitutional monarchy, the power of legislation is highly concentrated. All tax laws are from proposals from the Treasury Department and after approved by parliament and the royal, these proposals can come into effect and become laws. In the UK, nearly 90% of tax income is collected by central government. The HM Revenue & Customs takes charges of tax administration related affairs, including value added tax, sales revenue and tariff. 1. 2 Discussion of the UK taxation bases In computing the tax, we have to consider two parts: tax base and tax rate.
Tax base is the economic basis of a certain tax and it is the base amount to compute the tax liabilities. Tax base is different from tax object, for example, the total income is the object of income tax, while only the taxable income can be regarded tax base. On the whole, tax base has two categories: economical tax base and non-economical tax base. Economical tax base means the objects of tax that are related to economical actions, such as revenue, capital and sales; non-economical tax base has nothing to do with people’s economical actions, such as the poll tax that is taxed on every individual person without their actions.
In the UK, there are three kinds of tax bases: income base, capital base and consumption base. The income base is mainly used in individual income tax and corporate income tax. In most countries, revenue from income tax is the main source of government, so income tax base certainly has many advantages. Firstly, income tax base is much larger than other tax bases, because people with income above taxable allowance are the subjects to income tax. Furthermore, for most people, tax based on income is easy to calculate and manage for governmental officers. On the other hand, income tax base also has several disadvantages.
Firstly, income tax base is only available for cash income; for income as goods, income tax base would not work. Obviously, it is unfair to not tax on goods income. Secondly, income has many sources; some are easy to track, such as wages and bonus, while some are not easy to detect, such as illegal sales commissions. At last, different people have different ability to pay the tax and income is not a good indictor to measure their tax abilities. So it is very hard to make a rule or rate to keep fair among every taxpayer. Capital can be used to make income and can reflect individuals’ paying ability, so it seems to be a good base for tax.
However, the amount of capital would not generate the same amount of income, so it is not very accurate to use capital as a tax base. Furthermore, there are many kinds of capitals, which are hard to calculate and manage, and taxpayers’ economic conditions are not the same, for example a house with mortgages and without mortgage should not be regarded same, so capital tax base also has some drawbacks. At last, consumption is also a measurement of ability to pay tax; more consumption means more ability to pay tax and less consumption means less ability to pay tax.
According to Nicholas Kaldor’s theory, revenue should be the base of tax, not income. But here comes a confusing question: what if a person saves most of his/her income in the bank, rather than for consumption? Moreover, revenue tax base would affect the money supply on the capital market, because most people would tend to shorten their consumption and save money in banks. In a nut shell, all of these three tax bases have advantages and disadvantages, and there is no perfect tax base that can very fairly measure all taxpayers’ ability. So when considering the tax system, we should keep a balance between these three tax bases.
1. 3 Evaluation of a good taxation system What are the qualities of a good taxation system? Of course, nobody likes paying tax; however, tax is the main source for government revenue, which is used for providing public services. So we can also say taxpayers pay for the services they received, such as high ways and public schools. A good tax system should be both simple and equitable and simple. Equity has two directions: one is horizontal and the other is vertical. Horizontal equity means taxpayers with similar income should the same level of tax; vertical equity means taxpayers with higher income should pay a high level tax.
Even though companies have to pay corporate tax, all taxes are ultimately paid by individual taxpayers. So it is extremely important to keep tax system to be equitable. Besides, simple is also an important quality to a good tax system. The rules and laws should be easy to understand; the tax liability should be easy to calculate and the tax system should be easy to administer. If the cost to administer the tax is more than tax revenue received, this kind of tax system is inefficient to both taxpayers and government.
Complicated tax laws are costly to both taxpayers and the government; such laws are hard to administer and inefficient to collect. In addition, a good tax system should also be certainty, which means that the tax policy should keep being stable year to year, because this can make taxpayers to know the difficulty to evade tax payable and make a reasonable tax plan on the long run. On the whole, equity and efficient principles are two main principles to measure a tax system. A pie cannot be made both bigger and divided fairly. The same situation happens here.
We cannot expect a tax system to be both equity and efficient, for example, when cut down the marginal income tax rate for those high income taxpayers, their productivity would increase accordingly, while the tax equity would decrease. However, there is always a comparably good point between them, which we often call tradeoff. 1. 4 Evaluation of the UK taxation systemIn the UK tax system, income tax, national insurance, value added tax and corporation tax are the four main source of governmental revenue; the percentages are respectively 29%, 19%, 15% and 9%. On the whole, the UK tax system is quite stable.
According to Huijun Yang (2012), from mid 90s 20th century, the ratio of total tax on GDP is between 36% and 39%, so it would be easy for taxpayers to make a tax plan. In addition, the UK tax system is quite equity for its income tax rate ranges from 10% to 50% and low income taxpayers can deduct allowances too. In 2012, the income tax personal allowance increases from 7,475 to 9,000 and the highest income tax rate decreases from 50% to 45%. This new rule will benefit 23,000,000 basic income tax rate taxpayers. The UK tax system also operates efficiently and the cost to administer tax is comparatively low.
So overall, the UK tax system is well designed and works both efficiently and equity. However, there are still some drawbacks of the UK tax system. Firstly, the highest tax rate will be 45% in 2013, so the income gap between the rich and the poor will get bigger and bigger. Secondly, the tax takes less than 40% of the GDP, while, on average, government expenditure is 45% of the GDP, which means that the government need to increase their deficit to keep going on. Too much deficit will increase the governments’ financial pressure, because the borrowing must be paid by future years’ tax revenue.
If the deficit always keeps on a high level, the governments’ authority among public would be weaken, and government function cannot be operated well. Thirdly, individual tax is prepared and paid by individuals; these tax preparation costs, including service fee of accountants and time cost, are also hidden costs for taxpayers. At last, the British government provides comprehensive social welfare to all citizens; among them, most taxpayers pay for the services, but some lower income taxpayers or unemployed people enjoy the services free of charge.
So it is those high income taxpayers pay money for the low income taxpayers, and this would decrease those high income taxpayers’ work efficiency because some of their work are not rewarded. According to Holdford and Lovelace-Elmore (2001, p. 8), Vroom asserts, “Intensity of work effort depends on the perception that an individual’s effort will result in a desired outcome”. 1. 5 suggestions for the UK taxation systemThe following suggestions may be work to solve those drawbacks: * Creating more jobs for the poor and unemployed people * Increasing the highest rate of income tax.
* Optimize the tax structure * Simplifying complex tax law clause * Decreasing the corporate tax rate for starting companies 2. 1 proposals for the UK taxation system In the UK, the main taxes are: income tax, inheritance tax, council tax, value added tax, motoring taxation, corporate tax and capital gain tax. Even though all taxes have different tax bases, the ultimate taxpayers are every individual. As we know, a pie cannot both be big and evenly sliced. So for the UK government, it should find out a good point that can make the tax system be both efficient and equity.
According to the 2012 Budget statement by the Chancellor of the Exchequer, the Rt Hon George Osborne MP (2012), the main target for the UK government is to keep the economy in a stable increase trend. As mentioned in Osborne’s report, the UK’s economy is in a depressed time and the government has to both cut down expenditures and expand tax revenue. Therefore, we proposed three proposals on the tax system to improve the development of economy. Firstly, divide more the income tax rate levels between the higher rate and additional rate.
According to the current UK income tax system, taxpayers with band between ? 34,371 and ? 150,000 are applicable to the higher rate that is 40%, and taxpayers with band over ? 150,000 are applicable to 50% additional income tax rate. Apparently, the range from ? 34,371 and ? 150,000 are too wide that some mid-class families have to pay too much income tax for the high marginal tax rate. Taxpayers with income of ? 34,371 and ? 150,000 are totally different in tax payment ability, so it is not fair to let all of them pay tax on the same rate. From my point of view, taxpayers with band between ?
34,371 and ? 70,000 are applicable to tax rate of 25% because most mid-class taxpayers’ incomes are in this range and by doing so, there financial pressure will be reduced a lot; taxpayers with income ranges from ? 70,000 to ? 100,000 are subjects to 35% income tax rate and taxpayers with band from ? 100,000 to ? 150,000 pay income tax on 45% income tax rate. This proposal will greatly reduce the most mid-class taxpayers’ financial pressure and as the marginal tax rate increases for high income taxpayers, the total tax revenue for government will not decrease.
Secondly, impose property tax on people who own luxury houses or own more than three houses. In many countries, the property tax is imposed on individual house owners because real perporty is a remark of wealth. The property tax can help to reduce the gap between the rich and the poor. Moreover, as the tax is imposed on multiple house holders, the economic bubble in real estate investment or speculation will be greatly eliminated. Currently, the property tax is imposed on gains from capital, such as house rental not on capital itself. Even though taxpayers pay tax on their capital gain, the income gap still increases.
At last, decrease the rate of stamp duty for bond or stock transactions. Currently, the stamp duty rate is 0. 5%. As mentioned in the UK’s budget statement, the main target in 2012 is to keep the economy to be stable not do slow down. The decrease of stamp duty is really a good method to stimulate the economy development. On the one hand, the decrease of stamp duty is a good remark for the stock market, which would encourage more stock transactions. On the other hand, even though the rate of stamp duty decreases, as more transactions there will be, the total revenue from stamp duty will still increase.
As we know, UK is the center of worldwide stock market center. Stock market is the main capital source for public companies, so the boom of capital market will greatly promote the development of entity economy. In conclusion, the UK’s tax system is well organized and designed except for some drawbacks. I believe my proposals can effectively improve both equity and efficiency of the UK tax system and stimulate the economy development. Reference list Budget statement by the Chancellor of the Exchequer, the Rt Hon George Osborne MP, 2010.
HM TREASURY. [online] Available at: < http://www. hm-treasury. gov. uk/junebudget_speech. htm> Finance Act 1965 (c. 25), from UK Statute Law Database”. UK Statutory Publications Office, Ministry of Justice. Retrieved 2007-05-09. “HM Revenue and Customs receipts”. hmrc. gov. uk. Retrieved 2011-11-11. Kay, Richard. “Palace fear over Queen’s tax bill”. Daily Mail (London). Peter Victor (30 July 1995). “A brief history of VAT”. The Independent(London). Retrieved 13 January 2011. Principles of a good tax system,2010, tutor2u, [online] Available at: