Let us talk about taxing the rich

Simon Sweetman
Tax Consultant
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Does it work and if so, when?

There has been debate in recent years as to whether those with an income over £50,000 or so should pay income tax at 40, 45 or 50%.

This is a pretty scholastic debate which has assumed totemic status, the question really being whether you prefer to tax the higher earners, to hit on the poorer levels of society through VAT and the rest, or simply not to support all the services that the state has supported.

The Labour manifesto seems to envisage a figure of £80,000 at which a higher rate might apply. That does not seem unreasonable: It is getting on for three times the median. One might note that the average is being distorted by the steadily increasing proportion of those in work who are on the minimum wage. Even if Labour’s proposed £10 an hour was instigated (and assuming - a big assumption - that the individual worked a steady 40 hour week), that equates to an annual income of £20,800. Would you like to live on that?

What of a rise in corporation tax (which is of course at a historically low level at the present time)? Dire consequences are forecast. Companies will leave the UK rather than pay an extra one or two per cent in tax (not necessarily the same companies as will leave because of Brexit). This is probably sabre-rattling nonsense. No serious country works with a corporate tax rate of 17% and measures - international measures - may be needed to ensure that “residence” in tax havens is overridden. Any manifesto commitment to reduce avoidance will be worthless without international agreement as “one country” legislation will not work, and the promise will be as empty as the last few declarations of war against avoidance.

Furthermore it might discourage the existing behaviour of large corporations of paying out so much in dividends as to inhibit the capital investment that in the long-run they all need.

There was of course a time when tax rates were much higher than they are now. From the Second World War until Nigel Lawson tore up the rates and abolished surtax, everybody paid much more tax and most of them (while grumbling) did not seem seriously dissatisfied.

Your question here is whether the behaviour of the tax avoidance industry, aided by nods and winks from the Tory party, has been good for the country. Think on.

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15th May 2017 17:23

We are of course just arrived at 19%, 17% is mere future mirage.

I do not really disagree that much with your article, I think 20% is at the lower end and 25% should be the upper, however perhaps now would not be the best time, with Brexit uncertainties swirling, to announce a stark increase.

Maybe freeze at 19% (do not drop further) and later advise markets that the range of rates will be 19-25, i.e. we are at the lowest level.

Above might be tricky for Conservatives as they announced the walk to 17%, but maybe they ought to swallow their pride.

Re Labour's announcements (leaked- not clever) very much the wrong way to handle business confidence in uncertain times, somewhat ruined some good points in their manifesto 9leaked draft) by over egging the "nasty business is bad argument; they appear intent on beating all companies when it was the big ones who have been taking the ****, this may rebound.

Maybe the actual manifesto will draw a line between large and small which to date appears to have been lacking from their pronouncements, if not really poor politics-rank amateurs.

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15th May 2017 19:24

There was a general consensus from the mid 1980's until the last few weeks of Gordon Brown's government that the top rate should be 40%. Shamefully Mr Osborne never got back to this but hopefully the next administration will.
Nothing boosts the avoidance industry like high tax rates: cuts in rates will get these experts into more productive industries.
I don't remember many people happy with tax rates during the winter of discontent.

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16th May 2017 20:47

Glad to see that small company rate would be reintroduced if main rate increased as proposed.

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18th May 2017 15:26

people will always seek to pay nothing if they can....and the more you seem to have the more you seem to wish to pay at rates substantially lower than the 'average' guide on £20k does.

I am no economist, but I hazard a guess that those earning (or otherwise) large amounts of income in the UK is off the back of a society which provides for the poor/less well off/disabled etc) and provides conditions where the banks are happy to provide loans/credit etc. Of course you could go and live in some far off land and avoid all taxes...but then what do you have...a life without alcohol/gated security/armed with a gun at all times etc.

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19th May 2017 11:23

Justsotax; I don't agree. Many people don't mind paying tax but do mind if they feel they are being singled out and victimised for being successful! Whilst "Tax the Rich" always appeals (until you understand that "rich" means you!), the truth is that most people are honest and are happy to contribute to society. Reasonable (small) higher rates would encourage people to pay tax rather than take the risks of tax avoidance

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19th May 2017 17:34

Corporation tax is a recent invention and it is not obvious that it is a good one. Before Callaghan was chancellor under Wilson shareholders in a company with a million in the bank (most of which was recent profit) could decide, through the board, whether to take a dividend, which would be taxed as income, invest in expansion, or postpone the decision. The government was bound to get its cut eventually. Callaghan decreed that he government should get its cut immediately and shareholders who subsequently got a dividend would still pay. Barber could have reversed this but he chose instead to allow dividends paid on income on which corporation tax had been paid to escape personal taxation. Since corporation tax and personal tax rates were different this created an industry of tax avoidance advising people whether to work as sole traders or limited companies.

Taxing companies fits oddly with the rule they teach bookkeepers, that companies' assets and liabilities always match so companies own nothing.

Would the sky fall in if we went back to the pre-Wilson system and scrapped corporation tax altogether along with his other wheezes for showing that the gentleman in Whitehall knows best? Remember selective employment tax? Of course dividends would be taxed as income, or possibly (another old idea), at a higher unearned income rate.

Forgive me if I am missing something obvious here.

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23rd May 2017 15:08

I don't believe there are enough high earning rich people to tax. I think there is only a million or so and they will be paying 45% or so already.

As for companies they don't pay tax - its their customers pay it. If Boots the Chemist had to pay £100 million more wouldn't they just put up the price of everything so the shareholders remain on-side?

Maybe those spending the money could be more careful how they spend it too.

I don't want to pay any more tax thanks.

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23rd Jun 2017 14:28

Under the last Labour government the top rate of income tax was 40% for all but the last month of their term in office. Under the coalition and Tory governments the top rate has remained above 40%. So where is the tax reduction for the rich? Under the Tory government the IHT nil rate band has remained at £325,000, which with fiscal drag is an effective tax increase. So where is the tax reduction for the rich? The Tories increased the standard rate of VAT to 20%, they didn't reduce it. I will accept that CGT rates have fallen but in the overall picture that is hardly a big issue. CT rates have fallen but for owner managed companies, the revised dividend rules have increased the tax burden for most on withdrawal of funds. On anti-avoidance, the press in recent years is filled with stories of avoidance schemes being challenged and defeated. So again where is the tax reduction for the rich? Unfortunately for the general public, neither of the main political parties dare mention this!

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