[This paper was written in answer to the question ‘How would you change the UK tax system to improve future employment prospects and drive the UK economy?‘, as part of the PwC Paying for Tomorrow Prize, January 2015]
The political climate ahead of the 2015 election is perhaps one of disillusionment. For while the Treasury releases statements heralding an economic resurgence, big name international corporations avoid paying tax on British soil and the City of London continues to blunder through a series of debacles that invoke little sympathy from those not directly employed within its institutions.[1] All the while, Russell Brand has managed to ascend to the throne of populist politics, advocating some form of egalitarian anarchism, which, ironically, drives wedges only further between the people of Britain and the collective economy.[2]
This article endeavours to draw some links between the British fiscal system and two themes present in these aforementioned issues: those of engagement and employment. As Oliver Wendell Holmes Jr. said in 1904, ‘taxes are what we pay for civilised society’[3]. This comment alludes to an interesting dialectic between the tax system and civilisation; the latter more practically definable as the ‘developed economy’, given the connotations of law and order, of peace and security, that come with it. Effectively, if Holmes is assumed to be correct, one experiences civilisation, in the form of a developed economy, by paying taxes. If, therefore, one does not pay taxes, does one not experience civilisation?
Obviously, this is not the case, as the British welfare state is not designed to cater purely for those who contribute to it vis-a-vis those who don’t (if this were the case, it would slightly defeat the point of a welfare state). But what can be deduced from this idea is that those who do not contribute taxes to an economy hold little economic stake in it. This could explain the disillusionment, certainly of low-income households, with the contemporary British political system, and future employment prospects and growth must be designed around these disillusioned groups. This paper therefore proposes the injection of two concepts into the heart of the British tax system, those of engagement and employment, which it believes to have been lost in an age of neoliberal policies geared towards pulling people out of income tax and reducing corporation tax.
Hence, this paper argues that the UK tax system should maximize the public stake in the British economy through engagement by proportionally widening exposure to income tax and VAT. Simultaneously, it proposes reform of corporation tax, increasing tax on large profits and returning economic focus to employment by offering tax reliefs based on employment levels and not profits. By these policies, it is expected that the British economy can be driven forward by engagement of its maximised labour force, improving employment prospects and encouraging growth for everybody.
I – Providing an Economic Stake
Income Tax
The coalition continues to herald its apparent success in raising the income tax personal allowance, which has ‘pulled 3.2 million people out of income tax altogether’.[4] When the coalition took power in 2010, the Blair/Brown Labour government had left the personal allowance – i.e. the amount an individual can earn before they are liable for income tax – at £6,475.[5] Osborne and co. at the Treasury have subsequently increased the personal allowance by 54% to £10,000, and plan to increase it further, firstly to £10,600 as proposed in the 2014 Autumn Statement, and further still to £12,500 should the Tories win a majority in next years general election, to bring the allowance in line with the national minimum wage.[6] Incidentally, Labour had increased the allowance by an almost identical proportion – 54% from £4,195 to £6,475, if over a 13 year period – and John Major’s Conservative government a similar amount too – by 40% from £3,005 to £4,195.[7] Jackie Doyle-Price, Conservative Member of Parliament for Thurrock, has defended this policy, commenting that ‘enabling people to keep more of what they earn is the best thing any Government can do for its hard-working taxpayers’.[8]
Is what Ms Doyle-Price says debatable, however? True, by alleviating 3.2 million people of the apparent burden of income tax, more people have more income to do with what they wish. But is this the desired goal the British economy strives towards: a never ending policy of tax cuts until no individual bears the burden of giving up chunks of their own income to fund public services? What might this mean; that the British people invigorate their economy through consumer spending? As far as contemporary politicians can remember, that was what was hoped might happen during the recession brought on by the global financial crisis of 2008, and, given the refusal of Mark Carney, Governor of the Bank of England, to raise the national base interest rate from 0.5% to encourage lending and saving, it cannot be said that this policy has worked.[9] Increases in the freedom of money-capital have not, thus far, invigorated the sluggish British economy, the gross domestic product (GDP) of which has not grown by more than 1.0% in two consecutive quarters since 2003.[10]
It could be more productive to appeal to the British labour force, not through giving them more money-capital that they may or may not spend, but in a different way: by granting each and every member of British society with a stake in the economy by directly taxing each and every one of them. That is not to suggest that a huge burden be placed on those household incomes already struggling, but that a nominal rate of income tax be levied against all incomes, and perhaps an artificial one against benefit payments. Such an income tax system might look Table 1[11]:
| Table 1 – Income Tax | ||
| Income Level (£) | Current Tax | Proposed Tax |
| <1,000 | 0% | 1% |
| 1,001 to 5,000 | 0% | 2% |
| 5,001 to 10,000 | 0% | 5% |
| 10,000 to 31,865 | 20% (Basic Rate) | 17.5% |
| 31,866 to 150,000 | 40% (Higher Rate) | 42.5% |
| >150,001 | 45% (Additional Rate) | 50% |
The proposed income tax system would charge low incomes a nominal rate of tax that increases slightly from 1% below £1,000 to 2% up to £5,000, and to 5% up to £10,000. The current Basic Rate of 20% would be reduced to 17.5%, and the current Higher Rate and Additional Rate would both rise from 40% and 45% to 42.5% and 50% respectively. The first policy, of introducing taxes for incomes below £10,000, is aimed at solving the aforementioned problem of political and economic disillusionment, but providing a stake in the economy to those who, at least directly, do not currently have one. By introducing such a stake, it is expected that increased interest, and by extension capital, will be catalysed in the destination of the taxes claimed against all incomes, whereas previously, only those earning more than £10,000 would, in theory, have any interest in what happened to their taxes. In turn, it is expected that the increased attention of capital – human and financial – on public services would have a positive effect on the private sector, which would invigorate the economy more productively than simply freeing up more private capital through income tax reliefs. The second policy of reducing the Basic Rate of tax, and the third of increasing the Higher and Additional Rates, have been included primarily for public relations purposes and not ideological ones. A pure introduction of income tax for incomes under £10,000 would be very hard to sell; only an overall ‘smoothening out’ of the income tax system up and down the tax brackets would have any weight as a viable policy.
In conclusion, the proposed income tax system would eradicate some of the political problems which are contributing to the sluggish recovery that the British economy is experiencing: namely, lack of engagement and the rise of relative political extremism that threatens stable and equal growth. The proposed system works on the principle that once an individual has been forced to take a stake, in the form of taxes, in an economy, that they are more inclined to engage with it and hold their government accountable. In the case of the UK, it is expected that the increased attention and revenues from the proposed income tax system would pressure the government into channelling capital to the public sector, which in turn, in the form of healthcare, welfare, social security and even incentives such as subsidies, would drive the British economy.[12] It would also universalise the experience of taxation, which, in time, is expected to invigorate participation in political and economic processes where democratically possible.
VAT
Critics of the aforementioned proposed income tax system could use VAT to suggest that those individuals that would be granted a stake in the economy in fact already have one through indirect taxes. Most goods and services are subject to a Standard Rate of 20% VAT, which was increased from 17.5% in 2011.[13] If everything that is bought by consumers is therefore taxed, then, does the consumer, even now, fail to appreciate their stake in the economy? Does this in fact render a policy aiming to increase the value and scope of the economic stake obsolete?
In the first instance, no, because certain goods and services do not carry the 20% Standard Rate of VAT, and, logically, they are those goods most consumers might consider to be ‘essentials’. These include most forms of food – excluding served and hot food – books, newspapers and children’s clothes, all of which are exempt from VAT. They do not, therefore, provide the taxation stake that, for instance, VAT on luxury goods does. An economic stake could be provided to those buying these products, perhaps, if a nominal level of VAT was added, in a similar fashion to the small levels of proposed income tax on those incomes below £10,000. True, there exists a Reduced Rate of VAT, of 5%, on some goods and services, including home energy, so it could, politically, be extended to a wider range of products, perhaps at an even further reduced rate.
In the second instance, VAT is an indirect tax, which, given that it is paid by the consumer to an intermediary (i.e. the good or service provider) rather than directly to the government (i.e. unlike a direct tax like income tax) may not provide the economic stake one could be looking for. For instance, consumer receipts do not tend to include VAT as part of a breakdown of product expense; it is therefore difficult, firstly, to know how much VAT one has paid, given the discrepancy on exemption of certain products, and secondly, to remember that one has paid VAT built into the price of a product altogether. Unlike income tax, which is visible on a pay slip, VAT easily passes the consumer by on a day-to-day basis.
Reform to the VAT system could therefore provide a further stake in the economy for the consumer. This paper proposes the removal of VAT exemptions on all goods and services provided by non-charitable organisations in Table 2:
| Table 2 – Value Added Tax | ||
| Subject | Current Rate | Proposed Rate |
| Most Goods and Services (G&S) | 20% (Standard Rate) | 20% |
| Some G&S (home energy, children’s car seats) | 5% (Reduced Rate) | 5% |
| Zeo-Rated G&S (most food, books, newspapers, children’s clothes) | 0% (Zero Rate) | 3% |
The new system would also impose the publication of VAT per product to consumers, and annual tailored VAT contribution notifications, to ensure consumers knew how much their stake in the economy was through indirect VAT. This would further invoke taxpayers, a group which would extend to practically every British citizen, to take interest in the health of the system that their taxes support, and would therefore contribute to a most robust economy.
II – Invigorating Employment
Thus far, this paper has dealt solely with alleviating political and economic disillusionment, and not with practical means of harnessing the expected increased interest in public economic affairs. It is all very well taxing every earner in the country, but the framework needs to be in place to encourage employment of those taxed low-incomes. A reformed tax system could look at making alterations to business taxes in order to do so.
Corporation Tax
Tax on private, profit-seeking entities in the UK is generally quite business-friendly, and has become increasingly so, as it is only charged on profits, and at a rather low rate. The two current divisions in tax rates are displayed in Table 3:
| Table 3 – Corporation Tax | |
| Profit Level (£) | Rate |
| <300,000 | 20% (Small Profits Rate) |
| >300,000 | 21% (Main Rate) |
The coalition has steadily reduced the level of Main Rate corporate tax over the last 4 years, from 26% on profits over £300,000 in 2011, to 21% in 2014. Historically, corporation tax has been much higher, falling from 52% to 35% under Margaret Thatcher’s government, stabilising under John Major, and then falling to 28% by the end of the Labour premiership.[14] Whilst corporations can receive tax reliefs for various conditions, including profits between £300,000 and £1,500,000, profits on creative industries and research and development, there is currently no direct provision for a relief related to the employment.
Let us assume, by aforementioned reform to the system of income tax, that the British economy has produced a workforce encapsulating perhaps every member of its society, and that given inevitable systemic unemployment, which sat at 6.2% or 2,020,000 in mid-2014, persists, there will remain job-seeking taxpayers.[15] The private sector will have to absorb a decent proportion of these jobseekers, and thus fiscal measures must be taken to encourage increased employment. A key method of tackling this issue could be to offer tax reliefs to companies employing certain numbers of people, which could prevent high profits being channelled towards those in the boardrooms. The Main Rate of corporation tax could therefore be pushed back up, if reliefs were then offered that reduced a corporate tax bill in proportion to the amount of people employed. There could also be clauses invoked that earmarked funds generated from tax reliefs for paying employees rather than, say, for boardroom bonuses or research and development. Table 4 suggests a revised level of corporation tax, whilst Table 5 suggests reliefs based on employee numbers:
| Table 4 – Proposed Corporation Tax | |
| Profit Level (£) | Rate |
| <300,000 | 20% (Small Profits Rate) |
| >300,000 | 40% (Main Rate) |
| Table 5 – Proposed Tax Reliefs | |
| Employees | Relief on Corporation Tax |
| 250 – 5,000 | 5% |
| 5,001 – 25,000 | 10% |
| 25,001 – 100,000 | 15% |
| 100,001+ | 20% |
The immediate idea that large corporations would benefit from tax reliefs is countered by the rise in Main Rate corporation tax from 20% to 40%, and by the aforementioned clause that set aside relief funds for further employee benefit, whether that be through expenses or benefits, or indeed increased recruitment. These changes to the corporation tax system are expected to reinvigorate the dynamic of business growth in the UK away from growth focused on profits, and towards growth focused on employment. In turn, this is expected to satisfy the increased interest generated by the reforms to income tax, driving growth in the British economy that works for everyone, and not just those who already foster wealth and prosperity.
Conclusions
This paper has explained the problem of the lack of economic stake some members of British society have in the economy, and the problem of measuring business growth entirely through profit, both of which are intrinsically linked to the fiscal system, which provides the ultimate economic connection between the private individual and the state. In turn, propositions have been made which aim to increase and maximise the public stake in the national economy, through wider direct taxation of income and indirect VAT, to incite increased capital interest in public taxes and government funded services. To engage this enhanced interest and drive the economy into increased productivity, corporation tax has too been reexamined, with suggestions of the provision of reliefs based upon employee numbers proportional to profits.
Bibliography
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- 19 November 2014. ‘Minutes of the Monetary Policy Committee, 5 & 6 November 2014.
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- 23 December 2014. ‘Economy Tracker: GDP’. Retrieved 3 January 2015.
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- 12 November 2012. Vanessa Houlder, ‘US groups grilled over low tax payments’.
- 30 August 2013. Sarah O’Connor, ‘UK economy on track for faster growth’.
- 29 November 2013. John McDermott, ‘Russell Brand, Ed Miliband and the search for a popular left’.
- 5 March 2014. Daniel Schafer & Sam Fleming, ‘Forex scandal puts London reputation on the line’.
- 17 September 2014. Sarah O’Connor, ‘UK unemployment rate falls to 6.2%’.
Guardian
- 3 December 2014. Patrick Collinson & Rupert Jones, ‘Autumn statement: surprise rise in personal income tax allowance’.
HM Treasury
- ‘Autumn Statement 2014’. Retrieved 3 January 2015.
- [With HM Revenue & Customs] ‘TA.1 Income Tax Personal Allowance and Reliefs, 1990-91 to 2014-15’. Retrieved 3 January 2015.
- ‘VAT Rates’. Retrieved 3 January 2015.
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- A Tyrie, MP to G Osborne, MP. 4 November 2014. Column 643. Retrieved 3 January 2015.
- J Doyle Price, MP to G Osborne, MP. 4 November 2014. Column 643. Retrieved 3 January 2015.
Institute for Fiscal Studies
- ‘Corporation Tax, 1973-2014’. Retrieved 4 January 2015.
US Supreme Court
- 21 November 1927. Compania General de Tabacos de Filipinas vs. Collector of Internal Revenue, 275, 87, 100
Notes
[1] Cf. Sarah O’Connor, ’UK economy on track for faster growth’. Financial Times, 30 August 2013; Vanessa Houlder, ‘US groups grilled over low tax payments’. Financial Times, 12 November 2012; Daniel Schafer & Sam Fleming, ‘Forex scandal puts London reputation on the line’. Financial Times, 5 March 2014.
[2] John McDermott, ‘Russell Brand, Ed Miliband and the search for a popular left’. Financial Times, 29 November 2013.
[3] US Supreme Court, 21 November 1927. Compania General de Tabacos de Filipinas vs. Collector of Internal Revenue, 275, 87, 100.
[4] [A Tyrie, MP to G Osborne, MP] House of Commons Publications & Records, 4 November 2014, Column 643. Retrieved 3 January 2015: [http://www.publications.parliament.uk/pa/cm201415/cmhansrd/cm141104/debtext/141104-0001.htm#14110439000243].
[5] HM Treasury & HM Revenues and Customs. TA.1 Income Tax Personal Allowance and Reliefs, 1990-91 to 2014-15. Retrieved 3 January 2015: [https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/292303/Table-a1a.pdf].
[6] HM Treasury. Autumn Statement 2014. Retrieved 3 January 2015: [https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/382327/44695_Accessible.pdf]; Patrick Collinson & Rupert Jones, ‘Autumn statement: surprise rise in personal income tax allowance’. The Guardian, 3 December 2014.
[7] HM Treasury & HM Revenues and Customs. TA.1 Income Tax Personal Allowance and Reliefs, 1990-91 to 2014-15. Retrieved 3 January 2015
[8] [J Doyle-Price, MP to G Osborne, MP] House of Commons Publications & Records, 4 November 2014, Column 643. Retrieved 3 January 2015.
[9] Bank of England, 19 November 2014. Minutes of the Monetary Policy Committee, 5 & 6 November 2014. London.
[10] BBC Economy Tracker: GDP, 23 December 2014. Retrieved 3 January 2015: [http://www.bbc.co.uk/news/10613201].
[11] Note, that under the current personal allowance system, income between £0 and £10,000 is taxed at the Basic Rate of 20% in cases when total income exceeds £100,000 or the taxpayer was born before 6 April 1948. The proposed tax system would maintain this policy, ignoring the new proposed taxes on incomes below £10,000 for incomes exceeding £100,000. Also, under the current system of income tax, low earners still pay National Insurance contributions on amounts exceeding £8,060.
[12] This can be contrasted with experiences of, say, the United Arab Emirates, which does not impose any income tax whatsoever on any individual, prompting questions of democratic participation in the provision of public services.
[13] ‘VAT Rates’. Retrieved 3 January 2015: [https://www.gov.uk/vat-rates].
[14] Institute for Fiscal Studies, ‘Corporation Tax, 1973-2014’. Retrieved 4 January 2015: [http://www.ifs.org.uk/tools_and_resources/fiscal_facts].
[15] Sarah O’Connor, ‘UK unemployment rate falls to 6.%’. Financial Times, 17 September 2014.
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