VAT, income tax and the pre-budget report, by Carl Malways

The UK pre-budget report announced on Tuesday, this has to be one of the biggest anticlimax announcements in history.  It really was a case of the Chancellor trying to be all things to all men and in the end actually not doing much at all...and in some ways probably doing more harm.

There are specific problems in the economy, most notably in the banking sector.  These problems require a targeted approach, with substantial sums of money.

What we got was a costly and broad brush approach that seemed to be more concerned with headlines than strategy.  Once again the Chancellor went for big headlines and indeed he managed to get them...sadly for Mr Darling they were mainly negative.

Two big headlines emerged.  The first was the cut in VAT.  On the surface this seemed like a reasonable way to get people spending again.  But will it really?  Saving 2.5% isn't likely to make that much of a difference to most consumers, especially in the face of rising unemployment and economic uncertainty.  Many will choose to put this money in the bank.

The VAT cut is also highly costly for businesses.  It is estimated that changing to 15% and then back to 17.5% will cost retailers over £300m in admin costs as they change the tills and re-write prices.  Indeed, many smaller retailers will decide it will be better to pocket the VAT cut themselves instead of paying the admin fees.

The other big headline from the PBR was the outlook for taxation in 2011 and beyond.  We were told that those earning over £150,000 would pay a new top rate of tax of 45% - so much for simplifying the tax system but cutting out tax bands.  This again is a purely political stunt.  It will only impact upon a few higher earners and as such will raise just over a billion pounds, not nearly enough to cover the required tax increases necessary to fill to budget deficit.

Most people will be unfazed and unaffected by the rise in income tax, most people, myself included are a long way away from the £150,000 threshold.  They may think it is morally justified that those earning more should pay not only a greater amount in tax but also a greater proportion of their salary to the state.  Indeed, some may believe that the rich caused this recession and therefore they should be punished for it.

This is of course nonsense.  Firstly we all had a part to play in the current downturn.  From the government's poor regulation of financial organisations, financial organisations that failed to calculate risk properly and consumers who decided that taking out an 120% mortgage on a house was a good idea even though a slight change in interest rates would put them into default.  We all got giddy in the last couple of years so we should all shoulder some of the blame.

Secondly we live in a tax competitive world and therefore it will have an impact upon all of us if taxes are increased.  Not only will higher taxation reduce the incentives to work harder, take risks and get the rewards of higher paid jobs, it will also discourage people to work or set up businesses in the UK.  Many of the people at large multinational businesses who decide to set up in the UK are the senior management who, if they come here, will fall into the top tax rates.  If they see that they can move to New York and pay only a 35% tax rate or Saudi Arabia and pay nearly no tax then they have an incentive not to come here.

You may say so be it, if they don't want to contribute to society then they can go elsewhere.  But these companies are contributing to society in a massive way.  They provide the country with jobs, taxable income, skills and encourage the growth of other firms who supply them.

There are some people in the UK who need to stop thinking that wealth is a sign of greed and start to think of it as a sign of success.  These people have done well (in general) because they have worked hard, were clever and were successful.  They are the leaders of our society and their success breeds success for the rest of us.

Fair enough things aren't working that well at the moment, but things won't get any better by discouraging talented individuals from remaining in the country, working hard, taking risks and reaping the rewards that we all, directly or indirectly benefit from.

 

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