THE UK POLICY OF TAX CUTS

The UK policy of tax cuts

The UK policy of tax cuts

Introduction

VAT was introduced in 1973 due to the UK entering the European Union as a replacement for Purchase Tax and Self Employment Tax. Like purchase tax, VAT is an indirect tax that is charged on consumer expenses. It is levied at all stages of production from raw materials to the finished good and is charged at the point of sale.(Smith,1992)

There are four categories at which all goods and services may be split into and VAT is charged accordingly. The current 'standard rate' in the UK stands at 17.5%, which is applied to most purchases. Some goods and services have a 'reduced rate' of VAT at 5%, for instance electricity. Certain goods and services are 'VAT exempt', such as health services, rent and insurance. Finally, various products may have a 'zero rate' where they count towards taxable turnover, but have no VAT charges. Examples of such products include children's clothing, books and magazines, prescription drugs and charity.(Daunton,2002)

Discussion

The UK Government has announced that it is cutting the rate of Value Added Tax (VAT) by 2.5 percentage points, to 15%, in a move to get consumers spending again.This move, along other tax cuts, is going to require the government to increase borrowing to record levels (BBC News.) "I don't see this as a gamble, I see this as necessary, responsible action, that any sensible government would want to take."(Brown)

One of Labour's biggest problems with this spin line even to get through to the election is they cannot explain why the UK economy did not recover when others did, despite all the borrowing and printing. If we look at past sustained recoveries - after 1981, after 1992 - they both followed tough action to control the deficit. If we look at past Labour mismanagement, in 1964-6 and in 1974-5 spending and borrowing too much then led to a worse crisis, followed by the need for cuts and austerity imposed by overseas money lenders and by the financial markets.

The Tories propose to end the 20% tax paid by basic rate taxpayers on savings' interest, should they win power at the next general election. According to the Tories, anyone with savings who has earnings or pension income of less than £43,875 will be better off. They say those most dependent on income from savings would benefit most and someone with annual pension income of £12,000 would save £200 a year.

The amount of income that people aged between 65 and 74 would receive tax-free would rise from £9,490 to £11,490 while for the over 75's, tax-free allowances would rise to £11,640.

This would enable a 65-year old with £14,000 in pension income to save £400 a year, the Tories argue. “Plans were designed to create a "less materialistic" society based on a culture of "save, save, save" rather than "spend, spend, spend". (Cameron, 2009) "We need to make a really big change in Britain from an economy built on debt ...