Direct taxes related to earnings such as income tax are beginning to rise. The rises come in two forms. Higher earners are subject to increasing rates of income tax and national insurance. Secondly, middle income earners are sucked into higher rate tax bands by the failure of tax allowances to match inflation. This is called fiscal drag. Thirdly, many middle income earners will lose allwances and tax credits. This is especially the case for families with children. The government is also reducing a range of pension based allowances for higher earners.
With increasing taxes come increasing incentives to avoid tax. As taxes rise we see marginal tax rates in excess of 50% for higher earners we can envisage ever more imaginative schemes to avoid taxation.
Taxation on dividends and savings have always been with us. But as taxation rates increase, savings schemes that either avoid or ameliorate tax become more attractive.
Taxation is a major tool of economic management. By and large taxation is rising as a proportion of economic activity. This is because:
- The government introduces more new taxes than they do away with old taxes
- Percentage tax rates rise
- Taxation allowances do not keep pace with inflation - fiscal drag
- More people are brought into taxation as the cash or black economy shrinks as a proportion of GDP
There are many examples of the above being true. Car mileage allowance has just risen to 45p after being set at 40p in 2002. An indexed linked rate would put the new rate at about 75p.
