TAX SYSTEM

Politics of Tax Reform in the UK



Politics of Tax Reform in the UK

Introduction

The tax system of a democratic country is the result of the election by its citizens who express their preferences through different political parties. However, besides the political preferences of citizens, the tax system is also depends upon the political history of each nation and its international relations. Moreover, Flexibility is a positive feature of the tax system which reinforces its role as an automatic stabilizer of the economy. In order to understand the evolution of the prevailing tax systems in a globalized, it is important to analyse the system in the light of the international market. Moreover, the creation of organizations such as the European Union or the Organisation for Economic Co-operation and Development (OECD) influence the taxation policies of the countries.

The tax burden, which measures the relationship between tax revenues and GDP at market, is also an indicator of the contribution of the public sector in the economy. For all OECD countries, the tax burden peaked in 2000 and has declined since then. The political economy of taxation of UK is highly correlated with the Meade report of 1978 (Sachs, 1989, p. 903-938). This report consists of an authoritative and exhaustive economic analysis of options for tax reform.

Tax Policy in Practice

The reformation in the tax system of UK has taken place in five major areas. These include income tax, National Insurance Contributions, indirect tax, corporate and property taxes.

Income Tax

The decline in the statutory marginal tax rates has been the most significant reform in the past thirty years. After the elections of 1979, the winning party, the conservatives, reduced the rate on earned income from 83% to 60%, and the basic rate from 33% to 30%. This trend followed up till 1980s. Numerous protests were seen during 1980s when the Labour party highly opposed these cuts and reductions. However, the year 1997 brought good news for them as Tony Blair came with the election manifesto which promised of no further increase in the basic or top rates of income tax (Romer, 1975, p. 163-185).

National Insurance Contributions

Another major tax which is levied on the income in the United Kingdom is National Insurance Contributions (NICs). Employees and employers both have been suffering from the increased rates of NIC, up from 6.5% in 1979 to 11% in 2006-07 for employee contributions (Austen, Wallerstein, 2006, p. 1789-1823).

It has always been a topic of debate on the treatment of National Insurance Contributions. It is still undecided whether it should be placed in the category of income tax or any other class of social security contributions. The reason behind this confusion is the vague association between contributions made and entitlement in the United Kingdom, in comparison with the stronger links in other countries specifically in continental Europe (Snyder, Kramer, 1988, p. 197-230). This reason along with the process of hypothecation has led to difference in the payment of income tax and NICs. However, the fact that the marginal rates on ...