General Elections, which on average happen every four or five years, are those rare events that give those of us who work in tax the opportunity for the tax rule book to be thrown in the air while we all await with interest so see how it lands.
From a tax perspective, the 2017 General Election has so far been limited to John McDonnell MP, the Labour Shadow Chancellor, hinting that the “rich” should “pay their way more”.
To put this into context, recent research by the Institute of Fiscal Studies illustrated the following:-
- In 2015/16 the top 1% of earners paid 27.5% of all income tax receipts
- 56.2% of the adult population pay income tax (down from 65.7% in 2007/8)
- 5 million people pay income tax at 40% and above
By contrast, in 1978/79, the last year of a previous Labour Government, the highest rate of income tax was 98% with the top 1% of earners paying 11% of all income tax receipts.
Whatever your political persuasion, the conclusion from the above is that falling tax rates have meant that the richest taxpayers have contributed the most.
John McDonnell has defined rich as earning £70,000 pa and has proposed that the 45% income tax rate will begin at £70,000 with a new 60% rate to follow. Rumour also has it that he may propose increasing the basic rate of tax from 20% to 25% with rises also pencilled in for CGT and IHT.
Whilst on the face of this could be deemed an acceptable way in which to add funds to the Government’s coffers, it’s worth taking the following into consideration:-
- Generally, the richest members of Society are those most able, together with their capital, to leave the country. There are plenty of countries who would welcome them as President Holland has found to his cost
- Some taxes, such as CGT, are essentially voluntary to the extent that they are only due on completion of a transaction. If penal tax rates are introduced, it’s not beyond the realms of possibility that some transactions will be delayed and put off until lower tax rates return
- The evidence of the Laffer curve and flat rates of tax demonstrate that if governments want to increase tax revenue they should cut rather than increase tax rates
- High tax rates mean that entrepreneurs concentrate more on wealth preservation than wealth creation. Great news for tax planners but potentially bad news for the economy and public spending
Our recent For Love or Money survey found average total earnings for the 500 business owners that took part in our survey to be in the region of £95,000 putting them firmly in the proposed higher tax bracket(s). As such, these proposals are likely to be a hot topic with many of our wealth creating clients and could play a big part in their voting decision come 8 June.