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Government Taxation in the United Kingdom 3


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GovernmentTaxation in the United Kingdom

Taxationis a government’s major source of income. Taxes are the financialobligations owed to a governing body by an individual, corporation orother business to a government under whose jurisdiction the entityfalls. A tax is remitted periodically or as the necessitating eventarises depending on the nature of the remitting entity and the natureof tax. Governments realize tax incomes through various types oftaxes including income tax- chargeable on any income by people inemployment or business, import tax- chargeable for specified goodsentering the country via the country’s ports, excise taxes-chargeable within a country for specific services or goods, othertaxes- such as those normally charged for fuel carbon emissions, roaduse fees among others (Schoon, 1992).

Agovernment charges taxes mainly in order to get revenue to run itsoperations. The government is obligated to provide security,education, healthcare, infrastructure, and good environment forrealization of other community services including development andcommunity policies. Other than for purposes of revenue realization, agovernment may also collect taxes for wealth redistribution, controlof potentially adverse activities such as pollution and resourcedepletion, realization of economic stability among others (James,2009). The UK government for instance is expected to collect about£648 billion in 2014/15. The figure below shows the collections.


TheUK government collects the bulk of its revenue from income tax,national insurance and VAT. All the mentioned tax categories aremainly incorporated for purposes of government income creation. Othercategories of taxes levied by the government that fall into differentcategories include fuel levies, pollution charges, land use anddegradation charges among others. Corporation taxes are also a majorsource of government income, with an expected contribution of £41billion to the 2014/15 revenue pool. Once the revenue is obtained, itis used t fund various public expenses, including education, defense,social security, infrastructure, medical services and othergovernment services (UK Trade &amp Investment 2013). The chart belowfrom Her Majesty’s Budget 2014/15 projections shows the expenses.


Adecline in government tax collections would render some of the basicand vital services indicated in the chart above unrealizable, acondition which may lead to reduction of a country’s development.In addition, regulatory taxes aid a country in preventing adverseeconomic, infrastructural, social or even environmental effects. Forinstance, in the 2010/11 financial year, the UK government realized5% of her revenue from fuel levies, and 2% from alcohol taxes. Othertaxation not in the mainstream contributed to 4% of the nationalpublic revenue.

Theregulation of interactions between individual citizens and betweencitizens and foreigners is controlled by the government in order toensure that the domestic economy thrives, local investments areprotected, inflation is managed, and the normal business cycles inthe commercial sector are enhanced in order to ensure a steady,sustainable economic growth. The section below will explore the taxcuts announced in the UK, as well as their implications for the UKgovernment and her people.

Thegovernment announced a reduction in corporation taxes from 45% in1975 to just 20% in April 2015. This is in addition to havingdropped it from 23% to 21% in 2014. In addition, personal incometaxes were reduced from a high rate of 35% basic and 83% peak rate.From 2014, the personal taxation bracket will be rated at 20% baseand 45% on the upper limit. The tax cuts incorporated by the UKgovernment will have effects for the government, corporations, otherinvestors and the general population (UK Trade &amp Investment2013).


TheUK is ranked the sixth largest country in terms of trade volumes,with a budget as of 2011 of £1.516 billion, over 70 major airports,40 major sea ports, and a population of just 62 million people (HMTreasury, 2014). The reduction of corporation taxes from 45% to 20%by 2015 has put the UK among the lowest corporation tax countries,together with Russia, Turkey and Saudi Arabia. The following figureshow corporation tax by year 2015.


Thisfigure above shows a rapid transformation in the UK corporation taxpolicies, getting it from the bottom in 1975 to top by 2015. Thischoice has meant a change in attractiveness in the UK as aninvestment destination for major corporations. Consequently, the UKis now the number one investment choice among countries in theEuropean continent, with 43% of new investors preferring UK againstonly 15% for Germany and Ireland both at a distant second position(HM Treasury, 2014). The UK has set, on the onset of corporation taxcuts, incentives for different sectors to flourish and expand,including the oil and gas, banking and finance, retail andmanufacturing as well as the services sector. The government has putenergy regulation taxes to enable local manufacturers realize cheapenergy during their operations, as a reaction to the very high energycosts in manufacturing. This implies that services and products inthe UK manufacturing and services sectors will become cheaper andmore affordable, a factor likely to increase sales, and thereby VATfor the government. This factor is also likely to encourage manymultinational investors into the country, as energy costs are one ofthe main overheads for any company. In addition, the low corporationtaxes for investors, which is similar for local and foreigninvestors, will leave a healthy profit margin for investors- bothlocal and foreign, encouraging multiple investments (Schoon, 1992).Thediagrambelow illustrateshowtheUK governmentusestaxto internalizethe negativeexternality in thecountry.

(HMTreasury, 2014)

Anotherperspective of benefit through tax cuts is the benefits that willcome through increased investments. When many businesses offer thesame services or provide the same products, the consumer has varietyto choose from, and is therefore likely to get value for their money.In addition, competition is an ultimate tool for price control, asthe businesses have to lower their prices until they attain aworkable minimum (which is the optimum for the long term businessgrowth). Competition is likely to bring prices down as it alsoincreases product diversity and quality improvement. This will leadto improved living standards for the people, more purchases, andconsequently high tax revenue for the government. Therefore, this taxreduction will ultimately lead to tax revenue growth and surpass thecurrent figures if properly maintained. According to HM Treasury, thegovernment has helped more than 4,100 foreign investments setup inthe country since 2010, and led directly to the employment of 270,000people. In addition to tax incentives, the government has made iteasier for businesses to export, with a record 66,000 businessesbeing able to export since 2009. The government injected £ 11.8billion to aid businesses as export finance (Pettinger, 2011). Theimprovement of business environment in the UK is likely also tomarket the country internationally as a trading destination, and thisis likely to have compound benefits including economic stability,currency strength and gains through foreign exchange. The followingcurve shows the impact of taxes and benefits as indicated on a LorenzCurve.

(HMTreasury, 2014)

TaxCut effects on Mainstream Taxpayers

Personaltax remittance in UK has also experienced cuts from a base of 35% tojust 20%, with a peak rate of 45%. This is perhaps the mostsignificant tax initiative for the average taxpayer in the country’shistory, and could lead to various positive outcomes. Ordinarily, areduction of taxes for the majority taxpaying population isassociated with more saving potential, which leads to investmentgrowth as the people can realize excesses after their expenses. Thegrowth in the number of investments leads to wealth creation andre-investment, whose net effect is economic growth, and improvementin living standards. Revenue generation in turn leads to increase ingovernment taxes, especially through VAT collections (Levene, D2013).

Inaddition to tax cuts, the government has also announced major taxreliefs for low income earners, as well as adjustments for mediumincome earners.

Thisschedule has stipulated tax burden relief of up to 1,050 for thelowest income earners with income in the range 0-10,000 pounds. Thefull tax relief will be actualized by the 2015/16 budgets. The tablealso shows that the largest beneficiary of the tax cuts is thepoorest taxpayer. For instance, taxpayers with an annual gross incomeabove £ 80,000 will have a very minimal tax benefit of just £190.This tax scheme will mean improvement of living conditions formillions of low income earners. By 2014/15, 270,000 taxpayers willbe taken out of the tax bracket. In addition, the personal tax incomerelief will benefit 2.7 million people whose income is less than£10,000, while about 25 million people will benefit from low taxes.Of these, 20 million people will be basic tax payers while 5 millionwill be higher tax payers. There will also be losses, and 0.47million taxpayers are expected to realize tax increase averaging £50.Therefore, the individual taxpayer in the UK is going to benefit fromtax cuts, as more taxpayers will benefit than will lose from the newscheme (UK Trade &amp Investment 2013).

Implicationsfor the Government

Thetax adjustments by the government are likely to have short term, aswell as long term effects. The immediate tax implementation is likelyto have a revenue reduction for the government. However, the longterm effects are likely to be positive for the government’srevenue. The table below shows a summary of key government centralforecast for the period 2012 to 2018. The forecast shows a GDP growthpeaking at 2.7 in 2014, followed by a gradual reduction in GDP growthfor the period 2015 through 2018 averaging 2.5. The tax cutimplementation is therefore going to lead to a momentary economydecline, followed by a steady growth in the next decade. However, itcan be expected that the long term effect on government revenue andGDP growth is positive (OneFinancePlace, 2013).

Thetable also forecasts a momentary decline in household consumptionfollowed by a gradual increase in the years 2015-2018. Even moreimportantly, the new tax cut policies implementation will notnegatively impact the inflation rate, as it will remain steady forthe period 2015 through 2018 at just 2%. Employment will steadilyincrease from 29.5 million in 2012 to 31.4 million in 2018, a factorthat is likely to have a compounded positive effect on livingstandards, GDP growth, savings and investment, as well as governmentrevenue.


TheUK government tax cuts implemented in phases is a step towardsrealization of steady economic growth through various ways. Thecorporation tax reduction is likely to lead to investor confidence inventuring in the country, as well as realization of better, cheaperservices and products for the population. It is a good way ofensuring that the UK transforms it domestic market system into onegoverned by perfect competition, with consumers realizing thegreatest benefits from product availability, diversity andaffordability. It is also clear that, regulatory taxes aid a countryin preventing adverse economic, infrastructural, social or evenenvironmental effects. For instance, in the 2010/11 financial year,the UK government realized 5% of her revenue from fuel levies, and 2%from alcohol taxes.

Inaddition, the reduction in personal tax responsibilities will liftmore than 2.5 million people from strenuous tax obligations, a stepthat will enable the poorest within the economy to meet their basicneeds and have little funds for savings and investment. This willimprove their living conditions and help them generate wealth inorder to support the economy in the future. The average taxpayer willbe able to afford better services and buy better products, a stepthat will help improve domestic livelihood and earn governmentrevenue through investment taxes. The government is going toexperience a momentary decline in tax remittance, which will lead tostagnation in the year 2015, but this will be followed by a steadyGDP growth, steady low inflation rate and reduced governmentconsumption. In the long term, this tax cut arrangement is likely tobenefit the people, the businesses and the government.


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