Are our tax rates too high and unfair?

Whilst it's up to the government of the day to set the tax rates for the nation, tax accountants encounter the impact and effect of tax rates on their clients. In recent times, the inexorable increase in taxation is causing real issues to the competitiveness of the UK economy. The huge rise in Corporation Tax (for profits over ￡50k pa), the rise in Dividend Tax (which is a form of double taxation), the reduction of Entrepreneurs Relief (now re-named Business Asset Disposal Relief as Entrepreneurs Relief gave the wrong impression - seriously Mr Chancellor?!) and the freezing of thresholds (known as fiscal drag) to name but some. It also reduces the motivation of people, especially entrepreneurs, to earn more money, or take the risk to grow businesses which in turn pay taxes and provide employment that benefits wider society.

Sadly, it's all too easy for Chancellors of the Exchequer to kill the goose that lays the golden eggs. I was surprised when Peter Mandelson, before Tony Blair won the landslide election of 1997, said that Labour didn’t mind if people get filthy rich as long as they pay their taxes - that seemed a surprising comment from a Labour politician but it was an economically sound one.

Governments should be about encouraging the growth of the economy so that the tax take that comes from that growth then increases. Yet all too often, we seem to have a kind of top slicing in our tax policy whereby taxes creep up and up. We face the proverbial death by a thousand cuts.

As Chancellor, Rishi Sunak proposed an Income Tax cut for England in 2024/25 of 1% (which is still on the cards). In the context of last year's proposed rise in National Insurance rates which do not affect those over State Pension age, the proposed Income Tax cut seemed a somewhat cynical ploy to buy the votes of retired taxpayers before the next General Election since it would effectively then be done at the expense of non-retired taxpayers. ‘Disingenuous’ is a word that comes to mind.

Politicians of all colours often use the mantra of ‘fairness’ to defend the indefensible. How is it fair that the marginal rate of tax rises from 40% to 60% when taxable income reaches ￡100,000 pa (when the Personal Allowance is tapered away) only to fall again at ￡125,140 pa. A couple each earning ￡49,900 keeps all their Child Benefit whilst the single parent earning ￡60,000 loses all their Chid Benefit. How is that fair?

Alongside tax policy, we need to consider public spending. It's all too easy to let public spending get out of control and to expect those who have some money to pay the additional bill that is needed to balance the books.

Both the Passport Office and also Royal Mail (two monopolies) have publicly said that because there is less demand for their services, to cover their costs they have put up their prices by whatever they need to balance the books. You can do that when you are a monopoly but it's no way to run a business.

Public services do not seem to be giving the service that the public should expect especially for the cost of them. Tax accountants are well aware that getting through to HMRC on the phone can take 40 minutes and even when connected the call may suddenly be disconnected! Even when one does get through to a case officer, if the question is technical then a call may well have to be booked to speak to a HMRC technician two weeks later. A private company operating like that would simply not survive.

Some companies (both large and small) no longer bid for government work because the cost of putting a bid together and going through all the hoops is just too great. To ensure winning work, some large companies such as Carillion tendered for public sector projects under cost to win them - and look where that ended up with the insolvency of Carillion. The collapse of Carillion had a colossal impact on the construction supply chain. Suppliers and subcontractors are owed roughly ￡2bn by Carillion according to their results statement last year. Despite all the bid bureaucracy where was the due diligence by the public sector to prevent the award of contracts at below cost? Carillion’s collapse was easy to foresee. So, despite the humongous bid processes required to win public sector work – Carillion’s collapse indicates that its procurement process is not fit for purpose.

It is well known that people can usually spend their money more efficiently than governments of any political persuasion can spend it for them. This should bring us to consider the benefits of a small state with people choosing to take responsibility for their own lives and wellbeing, and those who are fortunate to be wealthy to be encouraged to be philanthropic (as many rich people are). I can all but guarantee that such people ensure that their money is spent prudently and wisely and the philanthropic benefit maximised.

Of course, the state should and must, without question, step in to protect the vulnerable but in a free-market economy the state should be encouraging people to use their efforts and ingenuity for their self-sufficiency and prosperity. The state should provide the kind of safety net that is more like a springboard to encourage innovation. Such an approach will inevitably bring us back to tax policy and the thorny issue of marginal rates of tax.

In the Autumn 2021 Budget, Chancellor Rishi Sunak announced that the Universal Credit taper rate was to be reduced from 63% to 55%. The taper sets the rate at which Universal Credit is withdrawn as claimants' earnings increase. Whilst the taper improvement is welcome. It can’t be right that those seeking to move on from Universal Credit can have a marginal rate of tax that is higher than the top rate of Income Tax.

The Resolution Foundation has calculated that growing numbers of families with children will face effective tax rates of at least 80 per cent and up to 96 per cent, as two systems for supporting children (Universal Credit and Child Benefit) collide. The separate systems for withdrawing Child Benefit (when one parent is earning over ￡50,000) and Universal Credit (when the household earns from as little as ￡4,548 next year) were originally designed to affect two distinct parts of the population.

But a decade-long cash freeze in the ￡50,000 threshold at which Child Benefit starts to be withdrawn (via the High Income Child Benefit Charge) means that 50,000 families will see their Child Benefit withdrawn at the same time as their Universal Credit is tapered away.

Families on Universal Credit often pay high marginal deduction rates. Paying Income Tax and National Insurance contributions, alongside having their Universal Credit withdrawn as their earnings rise, results in three million working adults paying effective tax rates of 69 per cent or higher, argues the Resolution Foundation.

This brings us to the current debacle over the resignation of the Deputy Prime Minister (Dominic Raab) which raises all sorts of issues about the relationship between democratically elected politicians and the civil servants who are employed to carry out the policy of the government of the day.

The realities behind the Deputy Prime Minister’s resignation are likely to be more nuanced than the polarised positions we read about in our newspapers but I am reminded of the terrific line in the comedy series “Yes Minister”.

In one episode Bernard Woolley asks “Why are there so many summit conferences for the Prime Minister to attend?

Sir Humphrey replies “That's the only way the country works! Concentrate all the power at Number 10 then send the PM away to EEC summits, NATO summits, Commonwealth summits, anywhere! Then the Cabinet Secretary can run the country properly.”

A General Election is expected next year. When it comes, let’s hope we are spared the mantra of “fairness” by our politicians which is all too often a smokescreen used by them to avoid the hard work of creating well thought through policies of substance. It is then up to the civil service to help whoever is elected to be our government to enact their well thought out policies. It is up to us, the electorate, to decide whether the policies presented to us are fair or not and we can vote accordingly!