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What is fair taxation?
Types of taxation
There are two main types of general taxation, affecting everybody, in most countries. One is a tax on a person's income, called Income Tax in the UK, and the other is taxation on goods and services purchased by people in that country, known as VAT in the UK. There are many other types of tax, such as Capital Gains Tax, Inheritance Tax, Stamp Duty, and many would claim that certain government methods of money raising are effectively taxation by more subtle means, such as fines for speeding offences from road traffic cameras, the television license fee, etc. but these are subjects for other discussions, and I want to limit myself in this hub mainly to the issues of VAT and Income Tax.
The proportion of tax income across the different taxes in the UK can be found at: http://en.wikipedia.org/wiki/File:UK_taxes.svg. This hub will not consider National Insurance, even though it is the second biggest source of tax income for the UK Government.
Before delving into the details, let's start by saying that taxation is a requirement in most countries, because it is the only feasible way for a country to raise money to pay for the governance of the country. Therefore, however much anyone resents paying it, they should always consider that without taxation there would be no free roads, pavements, hospitals, schools, rule of law and order, etc.
There are a few countries where the government can raise enough money from state-owned oil or international banking, such that it can run the country without the need to tax its citizens, but this is rare.
I'd like to start with VAT. A lot of people claim that this is an unfair tax, because it is a tax which hits the poorest hardest. This point was repeatedly made at the end of 2010 and the start of 2011, due to VAT increasing in the UK from 17.5% to 20% at the start of 2011, but I couldn't disagree with that point more.
Yes, it is true that it is a standard rate, and everyone pays the same rate, unlike income tax, but if you look at it in terms of who pays the most VAT, in actual pounds sterling, then this tax is much more a tax on the richest than it is on the poorest. For a start, VAT is not applicable to what are termed "essential" or "non-luxury" items, so basic food and drink are not taxed, and these are the items that the poorest are spending the majority of their income on.
Secondly, the richest in society are likely to be spending large sums of money on expensive luxury items, and on a £50,000 purchase, they will be paying £10,000 in VAT. That is a vast amount of money to be paying in tax, and poor people are not paying that because they cannot afford to be making £50,000 purchases in the first place.
So, VAT clearly affects the rich more than the poor, because a much greater proportion of what they will be spending their money on will be taxed at 20% (after they have already paid more income tax on their original earnings).
The other good thing about VAT is that it is a very difficult tax to avoid paying, so anyone spending money on goods and services in the UK, whether they are resident in the UK or not, whether they pay income tax in the UK or not, will have to pay this tax.
It is true that people find ways to avoid paying VAT by, say, swapping goods for services or other goods without money changing hands, or by someone, who is providing a service, not charging their customer VAT, and being paid in cash so that they do not have to put the transaction through their accounts, but this tax avoidance is fairly limited in value in the overall scheme of things. In general, if you purchase some goods or services from a known name or brand, you will have no choice but to pay VAT, and most transactions go through this route.
VAT is also fairly cheap to collect, as businesses have to calculate their own VAT debts and pay it to the government, or risk fines, or prison sentences for Directors, so the burden on the state for collection is much reduced.
Income tax is usually seen as a fairer tax in general, except by the richest sections of society who pay the most. However, my own personal view is that it is a greater burden on the low and middle income earners than it should be, and this view is supported by many.
The 40% tax range comes in at all earnings above £41,001, which means that almost everyone with a job which has required the obtaining of a quality university degree, and years of experience to develop some quite advanced skills - i.e. the very people who are seen as role models: hard-working, law abiding citizens, have to pay tax at this rate. Now, of course, because it is only the income above this level that is taxed at 40%, and everyone has a tax-free allowance, and then pays 20% on their earnings up to this threshold, someone on, say £60,000 is not paying 40% of that in tax, but is actually paying about 25% tax on their total earnings. This does not sound too unfair.
However, there are some unfortunate consequences of such a sudden step from 20% to 40% at £40,001 income. Say that you are on a salary of £40,000, but you can do overtime, or you are eligible for some small bonuses on top of that income. The practicalities of your situation are that all of your additional earnings are taxed at 40%, and this can make that income tax threshold seem remarkably unfair, making it seem not worth your while doing the overtime, or making your bonus become insignificant.
My own proposal would be to go back to more staggered rates, which was done in the past, and even to go further than it ever previously went by having the following increments:
% Taxation ..... Start of range ...... Top of range
No tax ....................£0 .......................£5,000
10% ....................£5,001 ..................£10,000
15% ...................£10,001 .................£15,000
20% ...................£15,001 .................£20,000
25% ...................£20,001 ..................£30,000
30% ...................£30,001 ..................£50,000
35% ...................£50,001 ..................£75,000
40% ...................£75,001 ................£100,000
45% .................£100,001 ................£125,000
50% .................£125,001 ................£250,000
55% .................£250,001 .............£1,000,000
60% ..............£1,000,001 and above
This would solve the problem of a sudden massive hike in an individuals tax bill on marginal earnings as they went across a threshold (now reduced to 5% instead of 20%), and the effect of it, compared with the current system in the UK, is to significantly reduce the income tax paid by those earning less than £15,000, reducing the overall bill slightly for those earning in the range of £25,000 to £200,000, and then increasing the tax bill for those earning over £250,000, with the increase accelerating as salaries rise further. This would mean that someone earning £1million would be paying just over 50% income tax on the full amount of that £1million, i.e. paying £506,000 in income tax.
The reason for this approach is that I do not believe that anyone is worth more than £250,000. At £250,000 income, the effective taxation on the total earnings would be 37.7% under my scheme, which is not unreasonable on what is a very high salary, which can support a family of four, with no other bread-winner, to lead a very comfortable lifestyle. No one needs to aspire to having more money than this amount.
The UK median wage is just under £26,000, and only 10% of people in the UK earn over £50,000. Thus someone on £250,000 is being valued as worth 9.6 people on the median wage, and worth 5 people who are just in the top 10% of wage earners in the country.
If now we look at people being paid £1million, and £10million, we are saying that they have a value of 38.4 and 384 people on the median wage respectively. Can anyone actually be worth 384 people, and not just any 384 people, but 384 people who represent the median level of skills, experience and ability across the country - i.e. 384 competent, skilled people?
I would say, "No chance", and I think that the majority of people earning those kinds of incomes would not claim to be worth 384 people, but they would say instead that they are able to earn that kind of money, so why shouldn't they?
Well, very few people would turn it down if offered it, but that doesn't mean that the government should let them keep it all. That is why my taxation scheme does mean that someone earning £5million would be paying 58% overall income tax. There is even an argument for extending the top rate further, maybe to 70%. During the Second World War, the top rate of tax rose to 99.25%, and, having been reduced at the end of the war, it rose to its highest post-war rate in 1974 of 83%, and the basic rate (now 20%) was 33%. In 2009, Alastair Darling was flirting with the idea of introducing a top rate of tax in the UK of 70%.
The point is that those with the top level incomes are not actually "earning" that money, in the sense that they are being paid what they are worth, because no one is worth that much, but they are privileged to be paid that amount, and should, by force (taxation), donate a large proportion of their continuous windfall for the good of the country that they live in, and should not feel that they are entitled to keep it for themselves.
In reference to the 70% "Supertax", my father always said that he would love to pay the Supertax because it would mean that he was rich beyond his wildest dreams! However, many of those earning such sums seem to regard it as their right to be paid so highly, and to keep as much of it as possible to spend on themselves. Thus, they go to great lengths with tax avoidance schemes, which to the rest of us seem to be extremely selfish and miserly - at least, if you are lucky enough to be paid such an absurdly huge amount, be gracious enough to pay your tax bill in full, and don't try to avoid it. Fortunately, many very wealthy people do give a great deal to charities and other worthwhile causes, and there is a line of argument that they should be free to spend their money on what they want to spend it on, rather than have to give it to the government for the government to spend it on what they think is useful, but that's a debate that I don't want to go into here.
In do want to say though that it is the duty of government to reduce government expenditure as much as possible, and spend our money wisely, and not to keep on raising taxes to fund ever more extravagant government schemes, or to compensate for poor financial management of the government machine.
The married person's allowance has all but been scrapped, and I think that that is not unreasonable. There is an argument for encouraging people to marry, but I don't think that it should be done through the taxation system for couples with no children.
However, those married people having children do sustain a significant financial burden as a result of having those children, and bringing them up. It is also statistically true that in couples with children, fewer of them break up if they are married than for those who are not married, so marriage should be encouraged for parents through a scheme which gives some financial relief to parents.
Thus, my proposal is that, up to a total family income of £100k, a married couple should be given a 5% rebate on their total family tax bill for having one child, and a 10% rebate if they have two children, with no rebates at all if the family income is above £100k. As two children per family allows the size of the human race to contract very slowly over time (due to children who do not go on to have children themselves through either not reaching adulthood, or by choice, or other reasons), but three or more grows an already over-large world population still further, there should be no additional tax benefit available to those having more children. Child allowances as they currently stand, can be scrapped, and this scheme would replace it.
Non-married couples would not be eligible for the tax rebate on both salaries, and could only claim it against one salary. This would encourage couples with children to marry, but not unfairly discriminate against single-parent families who are single-parent through no fault of their own.
In addition, in order to encourage people to make savings, which is a huge problem in the UK, with most people having a totally inadequate level of savings, there should be no taxation on interest on savings up to £1million, and just 5% taxation on interest on savings above this level. This would give a huge encouragement to people to save more, as against the current system, whereby people, especially those above the 40% tax threshold, feel that they lose so much of the interest on their savings to the tax man, that they might as well just spend the money and enjoy it today. This is especially true when returns on savings are low, and inflation is high, as is currently the state of play in the UK.
Tax is good, because it is needed in order to run a civilised society, but tax needs to be fair such that those who have plenty of spare money (even if they do not think they do) bear a bigger burden than those who are struggling to survive. Hard work and study, and the development of skills, should be encouraged, not discouraged by the tax system removing the rewards, but no one is worth more than £250k per annum of income, and the tax system should recognise this by re-distributing the wealth of those earning more than that, using that money to relieve the tax burden on the lowest paid.
Governments have a duty to reduce the total tax bill as much as possible through efficient government, elimination of waste, and the avoidance of schemes which do little to advance the overall good of the country.
The proposals above represent a fairer distribution of the tax burden than is currently the case, and for those who still insist that VAT affects the poor more than the rich, then the proposed income tax system above compensates for this, so that overall, the tax burden on the poorest, and middle income population, is reduced, and the cost of this is picked up by those with an income in excess of £250k.