Money, money, money. As many people try so hard to hold onto their well-earned incomes and salaries, taxes are forewarned to escalate.
It can be argued that whilst money is leaving the household pocket through tax measures there is a strong positive correlation between taxes and happiness, for instance, Sweden (tax rate of 52.9%) and Denmark (56%) are considered to be part of the 8 world’s happiest countries in the world- correlating to how fully satisfied consumers and citizens are with their public services, as their standard of living improves and there are more positive externalities such as social benefits. Thus, taxes are needed to help generate resources.
Conversely, it is blatantly clear that the government suffers from a huge government budget deficit since government spending has exacerbated the tax revenue they have collected. Taxes help ensure that the government can increase its spending and investment into our economic society- such as infrastructure, healthcare, and education- all factors that help stimulate economic growth and encourage foreign direct investment and make our country even more internationally competitive.
Reinforcing this positive multiplier effect, taxes help push the economy towards increasing global competitiveness. As society sees an improvement in all its sectors- making it more attractive to other trading partners. Taxes should be allocated to promote equality and preserve the income of poorer households- for the continuously growing wealth gaps can severely undermine the social cohesion of a country as well as its economic growth.
Yet given the current economic climate, in January 2023, the total expenditure of the UK raised to be about £103.6 billion- which was an increase of 13.6% or approximately £12.6 billion when compared to January 2022. The large sum of spending is due to energy support schemes implemented during the Russian- Ukraine crisis.
Tax brackets should be lower for small businesses, because whilst they don’t have a huge influence on government tax revenue, they still play a huge role in derived demand for employment and economic growth. Moreover, tax rates that are too high can withhold development in the private sector and prevent the upstart of new businesses. The government has proposed an additional income tax rate threshold from the 6th of April 2023, which will inevitably impact income taxpayers, employers, and pension providers. The ART will be lowered to £125,140 to ensure that public assets are being dealt with sustainably and fairly- thus allowing those with high incomes to take on a larger burden of the tax.
Taxation determines the kind of society we become.
Within an economy, taxes are commonly increased and applied to demerit goods such as tobacco, cigarettes, and alcohol. This is to help deter consumers to reduce their unhealthy behavioural habits and attempts to aid them with their addiction, for taxes can influence a person’s choices and decisions. In the case of demerit goods, taxes are deemed to be a beneficial thing- according to the OBR the UK government has managed to raise approximately £10.7 billion on tobacco duties alone. However, demerit goods tend to lean towards being price inelastic because consumers who suffer from addiction are still willing to pay higher prices- so whilst it may increase government revenue, it still fails to deal with the smoking rates.
“We are…reaping the costs of a long-term failure to grow the economy… the truth is, we just got a lot poorer”- Financial Times.
An increase in taxes will differ the relationship between the government and its public body. The bond the two economic agents have is pivotal for the growth of the country- the trust between the two is essential. If the public gains speculation that their well-earned money taken from them isn’t being used for their return to some extent, they are less likely to comply with the tax regulations in the first place. It is the government's obligation to improve the lives and well-being of its citizens through funding resources that align with the priorities of society.
Although, with the current strain on public services and stagnation in real wages- our country is much poorer than it once used to be, caused by the energy shock and the government's long-term failure to generate the well-needed economic growth to stabilise the living standards of today. After the Autumn statement, it is expected of a £25 billion tax rise in conjunction with £30 billion worth of spending cuts.
Many firms and individuals are known to be tax evaders. This is when they take illegal measures to prevent paying taxes- for instance not declaring their income correctly, declaring bankruptcy or using a different name to start upstart a company. In doing so, they could potentially be charged for penalties under the law, starting as high as £5,000. This is different to tax avoidance- which uses legal measures to pay the lowest possible tax, such as giving your partner your assets in order for them to pay the lower rate of income tax. As a result, the government has a shortage in tax revenue or more commonly referred to as the ‘tax gap’-which the HMRC estimates to stand at £32 billion.
From an environmental perspective, carbon taxes help protect our environment from increasing carbon emissions. Higher taxes increase the cost of production and for firms to retain more profit they will increase the burden upon consumers, which shifts demand to the left. To reach the UK’s target to be carbon neutral by 2050, tax policies are needed to reduce greenhouse gas emissions. From the 1st of January 2023 energy profit levies have been increased to 35% and a new temporary tax of 45% has been introduced upon electricity generators who have also seen a rapid increase in profits like the oil and gas sectors.
Income tax is a type of progressive tax, that takes a larger percentage of tax from people with higher incomes, as it recognises the diminishing marginal utility of money. Currently, in the UK the basic rate of income tax is 20% and the higher rate is 40%. Given the continuous pressures of an ageing population society faces today- higher taxes can be forecasted to pay for pension funding. Although, households have less discretionary income, which would lower consumption (60% of aggregate demand). But if this is countered with an injection from the circular flow of income, through measures such as increased government spending, then aggregate demand shouldn’t be impacted.
Taxes evidently impact several parts of the economy- directly and indirectly.
We need to strengthen tax administration regulations so that everyone pays their fair share and effectively create a sustainable improvement for society. Ideally, taxes should be set as low as possible to prevent the free-rider problem caused by tax avoidance. The government should also give more attention to taxes on production as it impacts the location of a firm’s businesses-for it could lead to potential offshoring as their after-tax profits are lowered and the return to company shareholders is reduced. Whilst the majority may argue to cut taxes dearly, it is evident that the wealthy would only seem to benefit from this-thus widening the inequality within society and the standard of living of the lower-income bracket, as there are reduced governmental services. According to the OCED tax cuts “don’t have any significant effect on economic growth and unemployment.” The government's focus should also shift to see the private sector as the future engine to generate tax revenue for the funding of essentials such as schools and hospitals.
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