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TAXATION IN THE UNITED KINGDOM

Taxation in the United Kingdom 2

TAXATIONIN THE UNITED KINGDOM

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Taxationin the United Kingdom

Taxrefersto themandatorylevyimposedby thelocalorcentralgovernmenton individuals,householdsandfirms. TheBritish governmentimposesa widerangeof taxeson its citizens.Thetaxsystemin Britain continuesto evolveas thestatepursues to maintainanddevelopa taxsystemthat meetsnationalgoalsandtargets.TheUK governmentimposesa rangeof taxeson its citizensmeantto accomplisha seriesof nationalgoalsandfiscalobjectives(Governmentof United Kingdom, 2013).

Governmentimposes tax to collect resourcesto be ableto providemeritgoods.Taxesare imposedon citizensforgovernmentexpenditureon energy,education,water,defense,energy,wastemanagementsystemsandhealthcare. Provisionof theseserviceswould be inefficientiftheyare runby theprivateentities,andas suchgovernmentofferstheseservicesthat are importantto allmembersof thesocietyregardlessof thelevel of income(OECD, 2007).. Forexample,thewaron terrorafter the9/11 bombingin USA has costtheBritish taxpayers an estimated£9.24 billion. Ahugepartof thisfigurewentto themilitary.By theendof financialyear2005/06,Britainhadspenta whopping£4.5 billion in Iraq andAfghanistan. All theseresourceshadcomefrom thespecialreserveof theGovernment of UK thatcurrently standsat £7.4 billion. Bytheendof 2013,UKwaron Afghanistan wasestimatedat £37 billion.Defenseis an importantportfoliothat consumeshugeproportionof taxpayer’s money(Provost &amp Tran, 2013).

Thegovernmentof UK imposestaxon its citizensto correctexternalities that emanatefrom variouseconomicactivities.Taxesare levied on goodsandserviceswheretheprivatecostisnot equalto thesocialcost.Externality is thecostimposedon thesocietyas a resultof productionactivitiesin thecountry.Forexample,tobaccoandalcoholicdrinksare heavilytaxedowingto thehealthhazardsassociatedwith smokingit.Additionally a hugeproportionof thehealthcare burdenis coveredbythecentralgovernmentand,therefore, cigaretteproductionis not a socialbenefit.

Anotherreasonfortaxationis redistribution of incomeandwealthin theUnited Kingdom. UK has a progressivesystem,wherebythehighincomeearners in thecountryare heavilytaxed.In thetaxyear2013/14 the startingrateis 20% of incomesin thetaxbracket,incomeup to £32,010, 40% in the tax bracketbetween £32,011 and£150,000 anda 45% forindividualsearningmorethan £150,000 (Government of United Kingdom, 2013). Evidently,moretaxwillbe collectedfrom individualswhoare in thehighesttaxbracketthan thosein thelowesttaxbracket,andpartsof these resources are usedforsocialprogramsintendedto overcomepovertyandinequality.The following chart indicates the role played by the UK taxationsystem in redistributing income.

(Pettinger,2011)

Overtheyearsthetaxburdenon citizenshas becomeheavier andheavier, the45% incometaxmay significantly curtailspending dueto reductionin disposable income,andthishas thepotential of causingunemployment.In everyfiscalyear,theUK governmenthas to collectadequateresourcesto caterforits recurrentexpenditure.Thisentailspaymentsmadeto allcivilservants,includingdoctors,teachersandpolice.Additionally, thelargenetworkof infrastructurein thecountryhas to be maintainedandrepaired.Asubstantialamountof fundsdirectedto recurrentexpenditureis coveredbythetaxlevied on theUK citizen(Government of United Kingdom, 2012).

Economicdevelopmentis one of thekeyfunctionsof anygovernment,andmostofthe developmentprojectstakemanyyearsandconsumemanyresourcesto complete.Taxesformthemainbasisforraisingmoneyfordevelopmentprojects.Forinstancein thefinancialyear2013/14 theUK governmentplansto executea numberof developmentprojectsallover thecountry.Prioritywillbe giventoredevelopmentof railwaystationat Gatwick Airport (£50million), developmentof nuclearpowerstationat Wylfa North Wales, Northern lineexpansionto Battersea (£1bn), andimprovementof A14 around Uttoxeter in Staffordshire. By theendof financialyear2014/15,UKgovernmentwillhavespent728.7, in healthcare, welfare,education,pensionsanddefense(Provost&amp Tran, 2013). Thetablebelow illustratestheamountof fundsthat wereallocatedforeachportfolioin thecurrentfiscalyear.

Taxationprovidesthegovernmentwith fundsto reducepoverty,homeandabroad,offerhumanitarianassistanceandprovideaidto vulnerablegroupssuchas refugees.In thesummer,theUK premier David Cameron promise£52 m of supportto thevictimsof civilwarin Syria(Provost&amp Tran, 2013). In theG8 summit,itwasrevealedthatBritain spends moremoneyon foreignaidthan anyotherG8 member.Atthecommencementof thepresentfiscalyear,George Osborneannouncedthatforeignaidwillaccountfor0.7% of theGDP. Thiswilltranslateinto £11.3 billion, andwith a totalpopulationof about 63 million people,itmeanseveryBrit willpay£137. Theonlyconvenientwayto raisethismoneywithout destabilizing theeconomyis through taxation.

Conclusion

Inprinciplegovernmentimposesa taxon its citizensin orderto improvethepublicwell-beingandlivingstandardsof all thepeoplein thecountry.Taxremittancemadeto thelocalandcentralgovernmentenablesthestateto provideallthenecessarygoodsandservicesthat cannot be providedefficientlyby theprivatesector.Thesegoodsreferredto as meritgoodsincludeeducation,defense,publictransportationandhealthcare. Governmentalsousestaxlevied to improvetheeconomicconditionsof thecountry,by creatingjobopportunities,reducinginflationandredistributing incomeandwealthto reducedisparitiesin thecountry.

ReferenceList

Governmentof United Kingdom 2012, AnInternationally Competitive Tax Offer: A Guide toUKTaxation.Retreivedfrom:https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/183408/A_guide_to_UK_taxation.pdf

OrganisationFor Economic Co-operation and Development. (2007). Fundamentalreform of corporate income tax.Paris, Organisation for Economic Co-operation and Development.

Pettinger,T 2011, TaxRevenue Sources in UK.Retrieved on 6 April 2014 from,http://www.economicshelp.org/blog/4001/economics/tax-revenue-sources-in-uk/

Provost,C. &amp Tran, M 2013, Aid: how much does the UK spend, why it`simportant and how it works.TheGuardian.Retrieved from:http://www.theguardian.com/global-development/2013/mar/20/uk-aid-spend-important-works

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TAXATION IN THE UNITED KINGDOM

Taxation in the United Kingdom 3

TAXATIONIN THE UNITED KINGDOM

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Taxationin the United Kingdom

Atax is a financial commitment or fee imposed on a citizen of a stateby the state’s government or other legislative authority mandatedby the government to impose taxes. Throughout the world, allgovernments impose taxes on their subjects for various reasons. Inaddition, citizens of one country may pay taxes for services offeredor transactions entered in other countries or jurisdictions. Thispaper will explore the issue of taxation from the residentgovernment’s perspective, with specific interest and examples fromthe UK government. There are various reasons why a government maylevy taxes on its citizens (Levene, 2013). Some of the reasons arepurely for wealth creation for the government, which is essential foreconomic growth and provision of vital administrative andinfrastructural services, and other reasons are punitive to thecitizens and are aimed at regulating the citizenry engagement inactivities with potentially negative activities in various aspects,for example pollution, monopolization of trade, and environmentaldegradation. The following are the main reasons for taxation

Generationof Government Income

Inorder for a government to meet its duties towards the people underits jurisdiction, it needs to have funds. A government may engage invarious activities in order to realize funds to meet the public debt.To do this, it may conduct taxation, invest in various stateventures, and borrow internally and externally among other sources. Agovernment needs funds to pay salaries for public servants, developinfrastructure, offer security for its people, maintain territorialintegrity, and improve the citizens’ quality of life among otherreasons. For instance, the UK has a population of 63 million peoplewho need basic services such as good roads, proper medical care,world class institutions of learning ( though a significantpercentage of these maybe privately owned), good judicial systems,clean and dependable water supply, welfare programs to improveindividual well being, state benefits for unemployed individuals,social support programs to aid in community cohesion and pensions forelderly persons unable to actively engage in wealth creation (James,2009).

Thetaxes so levied by the government sorely for revenue generation aredifferent and imposed at different rates. The major sources of taxesunder this category include income tax, corporation tax, nationalinsurance tax, Value Added Tax (VAT), business rates and council tax.Income Tax is the largest contributor (HM Revenue &amp Customs2014). In the year 2012, the UK realized £ 154 Billion form incometax alone. Income tax is that tax levied on people’s income, makingup to 30% of the annual government income. Income is categorized inmany brackets, including formal employment, retail business amongothers. National insurance tax is the second largest source ofgovernment tax. In 2013/2014, the UK government realized £104.1billion in national insurance taxes. It is realized through theproceeds of the national insurance scheme. Other major contributorsto government taxes include value added tax, business taxes andcorporation taxes (Levene, 2013).

RegulativeTaxes

Thegovernment also levies taxes in order to regulate potentially harmfulactivities such as environment tax due to engagement in activitiesthat are harmful to the environment such as carbon emission. Inaddition, the government charges duty for importation of productsalready manufactured within the country to encourage local industrygrowth (James, 2009).

TaxRates Regulation

Inthe year 2010, the UK government resolved to institute a tax regimewhich is very globally competitive, while at the same time relievingthe local population of a significant percentage of taxation burdens.The tax reforms initiative was proposed with the aim of streamliningthe existing taxation regime. The core strategic changes includedintroduction of a low corporation tax with few reliefs to avoidabuse, realization of a long term stable scheme needing minimalchanges, a regime minimizing complexity, enabling of a levelplayground for taxpayers and enhancing transparency (UK Trade &ampInvestment,2013).

Thechanges made in the corporation tax made the UK the lowest in the G20countries at 20%, along with Russia, Saudi Arabia and Turkey. April2014 has seen the reduction of corporation from 23% to 21%. This lowtax is not discriminative of foreign investors. Coupled with a veryfriendly business environment and flexible entry requirements forforeign investors, this means a rapid increase in corporateinvestments in the UK marked with rapid growth in both thecorporations and the local economy. Corporation taxes havetraditionally stood at 52%, higher than that of the highest countryunder G20, the US, at 40%. This taxation rate contributed to 8% oftotal government tax revenue in 2010/2011 (UK Trade &amp Investment,2013).

(Pettinger,2011)

Withthe new rates of tax halved, the number of investors in the UK isexpected to rise exponentially, until market saturation andcompetition discourages further investors. For the economy, this willmean rapid growth, and greater contribution by corporations to thenational revenue, as well as compounded benefits in terms of jobcreation for local population, reduced prices or fees for servicesand products due to influx of businesses engaging in production, andhigher business stabilities due to a perfect competition market(Pettinger, 2011). Already, the UK is the preferred destination formajority of overseas investors in Europe, according to the UKgovernment data. The chart below illustrates this fact.

(UKTrade &amp Investment2013)

Whilea tax cut may have negative effects for government revenuerealization, a strategic tax cut coupled with invest incentives asthe one done here is likely to have a net rise in tax relatedrevenue, at least after several years in which businesses grow. Onenegative outcome for this tax cut and investor influx is thechallenge it may pose for local industries that will experiencecompetition. In extreme, unregulated situations, such localinvestments may collapse (James, 2009). However, proper governmentmeasures to economically boost local investments and shield them fromunhealthy competition from incoming investors with larger capitalbases and market saturation capabilities may protect the local firms(UK Trade &amp Investment2013).

Forthe local, non taxpaying population, this influx of foreign investorsdrawn by tax cuts and non-discriminative tax regimes and businessentry requirements is only likely to provide benefits. Firstly, theincrease of investors will lead to a perfect competition market willproduct diversity, quality improvement and price reduction. Forinstance, influx of airlines is likely to increase travel options andcosts for air passengers, giving them better mobility over variousdestinations. In addition, job opportunities for local population arelikely to increase as a result of setup of multinationals in thelocal investment platform (UK Trade &amp Investment2013). In addition to the corporation tax cuts, individual taxpayers aregoing to benefit from tax adjustment from a base of 45% in 1975 to abase of 20%, and a maximum of 45%. This cut will have a complexinterplay of effects whose net result may benefit or disadvantageboth the government and the people. It will all depend on howcarefully fine tuned the tax policy is, and how it gets integrated inthe long term economic policies in the UK (Victor,1995).The underlying economic principle is that tax remittance helps thegovernment meet its obligation towards the people, which is necessaryfor economic growth. However, high tax rates are punitive for apopulation, unless coupled with robust wealth creation policies andopportunities by the government. High taxation reduces a population’searnings, savings and investment opportunities. The basicconstruction for tax relief for individuals includes a tax relief of£ 9440 for persons with income less than £ 100,000. The first£32,010 of taxable income is taxed at 20%. Income in the range£32,010 and £150,000 sterling pounds is taxed at 40%, and allincome above £150,000 is taxed at 45% (UK Trade &amp Investment2013).

Thisarrangement is very positively impacting the low income segment ofthe taxpaying population, as the highest tax one can pay when theirincome falls under £100,000 is £10,560. This tax structure alsomeans that persons earning below £47,200 have no tax obligations, afactor likely to encourage economic growth in the ultra-low incomesegment as the people in this bracket can engage in small scalewealth creation and investment without being affected by taxobligations. In 2014/15 year alone, 257,000 people in the lowerincome segment are exempted from taxation, and a cumulative total of2.7 million people have been lifted over the taxation system sincetax reforms. The system will benefit about 24.5 million people,average £50, while 0.47 million people will lose, average £50. Thisis a net positive effect for the larger number of taxpayers (UK Trade&amp Investment2013).

Theeffect of lowered tax rates for the income tax segment is goingaffect the government income from local taxation negatively becausethe revenue from income tax contributes up to 30% of the UKgovernment revenue. This factor, coupled with the fact thatcorporation taxes have also been greatly reduced, is likely lead tolead to a short term budget deficit unless clear measures are putinto place to aid the government in meeting its short term budgetdemands (OneFinancePlace 2013). For a government that reduces taxes,there are two broad outcomes that may affect its long termperformance. One, the lowered tax rates may lead to a deficit ingovernment funds which may force it to cut down on non recurrentexpenses, such as investments, infrastructural development, boosts inthe Small and Medium Enterprises (SMEs), as well as other capitalrequiring government initiatives. This, in return, may lead tosluggish business cycles, poor investment environment, low foreigninvestor turnout, and less business revenue overall (UK Trade &ampInvestment2013).This in turn led to reduced profitability in the public and privatesectors, and consequently lower wages for workers, and so even lessertax related revenue for the government. This vicious cycle ofeconomic degradation is lethal for any economy, and ultimatelyrequires very drastic measures to turn around. On the other hand,reduced taxation may positively impact the taxpaying spectrum of acountry. This positive effect may come as a result of increasedsavings and re-investment of the realized surplus in domesticexpenses where families have capital to spare. The normal course ofbusiness leads to profitability, and the profits may get re-investedor ploughed back into the businesses leading to sustainable organicgrowth.

Thisin turn leads to increase in taxes realized by the governmentdirectly through income taxation, as well as indirectly through othertax segments such as Value Added Tax (VAT) which depends on asociety’s spending power, a factor directly tied to the livingconditions of the majority in the society. When a society isinvesting, there is likely to be improvement in the generalpurchasing power, and therefore cumulative economic growth is likelyto result. The nature of the tax system is such as to follow thecumulative growth trend, because of the high income positioning ofthe majority in the population, as well as the maturity of thevarious leading sectors within the UK economy such as the servicessector, industrial sector, the IT sector and manufacturing sector.Thus, a tax reduction is likely to positively affect the UK economyin the long term, because access to capital is going to improve(Schoon, 1992). This likelihood is further multiplied by the improvedinvestor incentives for overseas investors, who are likely to preferinvesting in the UK in the coming years. The trend in all majoreconomies in a reduction of people dependent on government employmentand a rise in people getting in the private sector. One of thebiggest challenges facing people in the private sector is taxation.Thus, a reduction in tax obligations for private sector, especiallywhere it concerns new, small scale investors, is a very big stepforward in fast tracking SME proliferation. This is a vital stepforward, considering the pivotal role SMEs are expected to play inthe post industrialization economic development of major economies.

ReferenceList

HMRevenue &amp Customs 2014, IncomeTax.Retrieved on 6 April 2014 from,

http://www.hmrc.gov.uk/incometax/

James,M. (2009). TheUK Tax System: An Introduction.Spiramus Press Ltd

Levene,D 2013, Tax receipts since 1963. TheGuardian,Retrieved on 6 April 2014 from,

http://www.theguardian.com/news/datablog/2010/apr/25/tax-receipts-1963

OneFinancePlace2013, Importanceof Paying Taxes.Retrieved on 6 April 2014 from,

http://www.onefinanceplace.com/34-importance%20of%20paying%20taxes.html

Pettinger,T 2011, TaxRevenue Sources in UK.Retrieved on 6 April 2014 from,http://www.economicshelp.org/blog/4001/economics/tax-revenue-sources-in-uk/

Schoon,N 1992, Government may impose taxes to reduce pollution, TheIndependent.Retrieved on 6 April 2014 from,

http://www.independent.co.uk/news/uk/government-may-impose-taxes-to-reduce-pollution-1554863.html

UKTrade &amp Investment 2013, Aguide to UK taxation.Retrieved on 6 April 2014 from,https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/183408/A_guide_to_UK_taxation.pdf

Victor,P 1995, &quotA brief history of VAT&quot TheIndependent(London)