A fair tax take?

Thursday, 01 October 2009
A closer look at tax rates.

I do hope you will appreciate that I am not being political in my article this month, but all the main UK parties, and for all I know all the minor parties, are agreed that, at least in the short term, tax rates have to go up to produce some of the shortfall in government receipts. My concern is that I have heard not a word of debate about what is an appropriate cap to the level of taxation to which an individual should be subject. Are we to get to a stage where the government takes all income in taxation and then hands out an allowance, pocket money if you like?

Over the past few years, governments have been taking more and more from taxpayers to fund increasing commitments

In the UK we have been here before, and it is true that in the late 1960s, when the top rate of tax on investment income stood at 98 per cent, there was added in one tax year a Special Charge, which took the rate on investment income to over 100 per cent. It will come as no surprise to note that (in that year) those of independent wealth financed their lifestyles by selling their capital assets. Capital gains tax (then at a rate of 30 per cent) only applied to a gain since a base date of 1965 so there was little practical tax charge in that year.

So starting in the 1980s, tax rates dropped dramatically to the top rate of 40 per cent with which we have lived for 20 years and more until now. Let us remember, however, that those high tax rates of the 1960s were accompanied by much larger income tax allowances. Interest on loans (particularly to buy or improve property) was much more widely tax deductable, life insurance and assurance premiums were relievable, there were child allowances, there was the married persons allowance and unlimited payments into pension funds were also allowable.

Now we look at tax rates that have very little in the way of reliefs. The withdrawal of those allowances was a tax increase in reality. For example, when the married persons allowance was withdrawn, the yield of tax was equivalent to more than a penny on the basic rate of income tax. But we were mollified by the fact that the headline rate of tax remained at its comparatively low level.

However, it is my sense that people are now much more sensitive to some of the ruses that are being invented. In particular, the withdrawal of the personal allowance for those with taxable income over GBP100,000 means that in that margin of income, taxpayers are being taxed at a rate of over 60 per cent. That is before we look at the effect of rising National Insurance charges, which we all know are an additional employment tax, and we note the reduction of relief for payments into pension funds. At the same time, the capital gains tax rate has been reduced to 18 per cent. Is this not going to be the late 1960s all over again? Those taxpayers who feel this is too much (and it is a personal matter as to where each of us draws the dividing line) may decide that they will try and convert income sources into capital assets so that they do not pay at what they consider a level of tax that is unacceptable. Governments, not just in the UK but around the world, have made self-righteous protestations about the need to attack tax avoidance and certainly, when I look back to the 1970s, the artificiality of many of the schemes that were proposed was, and I speak personally, deeply unattractive. But over the past few years, governments have, to raise revenue, been taking more and more from taxpayers to fund ever-increasing commitments. And local authorities, being squeezed by central government, are thinking up new ways to raise revenue. It all has to come from the taxpayer’s pocket.

I am sure that there has to be a stopping place and, if it is not recognised, then we will find an explosion of tax mitigation schemes and a return to a much more widespread black economy, which would be damaging to us all. There is, I suspect, in all taxpayers something of the words of General de Gaulle (and I will not attempt to do the French!). He said ‘This animal is nasty – when you attack it, it defends itself!’

Author block
Martyn Gowar

Martyn Gowar TEP is a Partner at McDermott Will & Emery UK LLP and an Editor of the STEP Journal.

STEP Journal
United Kingdom

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