UK Coalition Government to Scrap 50% Tax Rate to Spark Economic Growth
Politics / Taxes Mar 17, 2012 - 12:25 AM GMTThe Conservative party media spin machine has gone into over drive by spreading the word that George Osbourne will cut the top rate of income tax from 50% to 40% in next weeks budget in an attempt at reversing some of the damage done by the last Labour government that all but destroyed large swathes of the private sector in favour of pumping resources into the Labour voter friendly unproductive public sector.
The higher rate tax cut will come despite Lib Dem opposition, who will likely extract a high price in terms of their primary tax objective of raising the starting rate for paying income tax towards a personal allowance of £10,000.
ALL taxes on the private sector are bad because they extract income from the productive sector of an economy and plant it into the unproductive public sector. The greater the tax burden the lower the economic growth potential of an economy will be, which Labours 50% tax rate exemplifies as it raised barely 1/10th the amount of tax revenue that Labour promised it would whilst acting as a major disincentive for entrepreneur's to relocate, expand and employ workers.
Off course in a democracy, governments have to tax and print debt / money (inflation) to buy votes to get elected. However over time this burden on the productive private sector can grow and grow as the number of vested interests grows until one day the peoples of a country such as Britain wake up to find that the unproductive public sector has grown to such an extent that it is now more than 50% of the economy which puts it far beyond the capacity of the private sector to cover the costs of and thus the economy enters a death spiral of unfundable deficits as is the case with Greece and most of the euro-zone and against which Britain has been fighting hard to avoid a similar fate.
To date the Coalition government has attempted to correct the structural imbalances in the UK economy that is resulting in a continuing annual government budget deficit of £120 billion by means of spending cuts and money printing inflation (QE) so as to devalue total value of UK debt and liabilities that stands at approx £11 trillion.
However on the flip side the Coalition government has to large extent subverted many of the positive benefits of spending cuts by introducing a series of tax rises such as VAT, freezing of annual tax allowances and scrapping of tax rebates such as the proposed cut in child benefit to 40% rate tax payers. This Frankenstein policy of doing what's best and worst for the economy is resulting in economic stagnation where probability favours a flat lining economy during 2012.
To kick start growth the Coalition government is starting to recognise that it needs to take the bold step of freeing up capital available to the private sector by means of scrapping the top tax rate of 50%. However it should be recognised that is this a small step in the right direction as it only effects approx 250,000 high earners , though will act as an incentive to attract new high earning tax payers from abroad to come and boost productivity and locate business into the UK.
On balance, given the state of the country's finances, next weeks budget cannot be a net give away which means the two tax give away's of raising the starting personal allowance and scrapping of the 50% rate will be balanced by not increasing the allowance for higher (40%) rate tax payers which would have the effect of pushing many more people into the higher tax bracket with all of the associated negative consequences.
So the real tax cuts will not materialise until 2013 when the Collation government starts to spend and cut taxes in an attempt at generating an mini economic boom as the government buys votes in advance of the scheduled 2015 General Election by which time today's angry 99% will have long since forgotten about next weeks tax change in favour of the 1%.
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By Nadeem Walayat
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Nadeem Walayat has over 25 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis focuses on UK inflation, economy, interest rates and housing market. He is the author of three ebook's - The Inflation Mega-Trend; The Interest Rate Mega-Trend and The Stocks Stealth Bull Market Update 2011 that can be downloaded for Free.
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