Darling to Target Tax Increases at High Earners

UK Chancellor Alistair Darling appears ready to announce a whole range of tax increases targeted at higher earners.

According to the Telegraph Darling is expected to use the Pre-Budget Report to increase the rate of tax on company profits and levy additional taxes on the super rich such as bankers. These tax increases are on top of the increases announced last year that will come into effect in April 2010. Already in the pipeline are increases in national insurance plus a 50% tax rate for those earning more than £150,000 per annum.

Sadly for the socialists in charge of UK government finances, they do not seem to recognise that these sorts of taxes will just drive higher earners away. They are the sort of tactics tried by the Labour governments of the 1960s and 1970s. The public sector deficit is expected to top £175 billion in 2009/10 as tax revenues fall.

UK Economy Shrinking Faster Than Previously Thought

The Office of National Statistics (ONS) has revealed that the UK economy is shrinking faster than earlier figures. The growth figure for the 1st Quarter of 2009 has been downgraded to -2.4% from the previous -1.9%. Not only is the economy shrinking faster but the ONS has revised 2008 GDP figures to show that the economy started shrinking earlier than previous indications. This means that the UK recession began in Quarter 2, 2008 rather than Quarter 3.

The good news for Chancellor Alistair Darling is that with such poor figures for early 2009, it may well be possible to show that the economy is growing by the time Labour calls the 2010 General Election.

The Great Labour Rip-Off

Welcome to the land of the Great Labour Rip-Off. Yes, we're finally getting the socialist tax regime we deserve. After 11 years of pretending they were business and entrepreneur friendly we are now getting the traditional Labour tax treatment.

For those who haven't fully digested yesterday's news, presented by Alistair Darling as an answer to the recession, many sections of the population are heading for a 60% plus rate of marginal tax.

Changes to National Insurance (NIC), tax thresholds and the imposition of 45% top rate of tax, will mean people at both ends of the income spectrum will have see less than 40p from each additional £ they earn. This is Scandinavian levels of taxation without the Scandinavian level of public services. I know, I used to live there.

During the early 1990s I was a higher earner living in Denmark, which had a top tax rate of 62%. Interestingly, this top rate included local income which was effectively the rates - now council tax. On top of this all my mortgage interest (and any other loan interest) was tax deductible. Secondly as a family, we claimed £120 per month per child in family allowance. When all the calculations were made my effective taxation rate was less than 30% of total income - and I was earning £65k a year in 1992, equivalent to say £150k now.

When everything was weighed up I was paying about the same net level of tax as I would have done under the then UK regime of John Major. But living in Denmark meant a World Class health system, clean streets and low crime. Soon, in Gordon Brown's socialist dystopia, you will have marginal tax rates of over 60%, with council tax, water rates, prescription charges, parking charges at your local hospital combined with third world levels of public services. How have we got here?

Government to Lower VAT

According to a report posted this evening on the Telegraph.co.uk website, the Chancellor of the Exchequer Alistair Darling is about to announce a temporary cut in the rate of VAT (Value Added Tax). The reduction would be from 17.5% to 15%. This would be the minimum rate allowed by the EU.

The reduction is estimated to cost £12.5 billion. Essentially, the reduction is the reverse of Margaret Thatcher's approach. Thatcher preferred indirect taxes (taxes on spending) rather than direct taxes (taxes on incomes). The Labour logic is that if you cut taxes on incomes people may just save more. If you cut taxes on spending you encourage them to spend more.

Now that the tax reduction story is in the public domain, the government must move quickly. As Darling found with rumours of reductions on stamp duty, any anticipation of a tax cut will encourage consumers to defer purchases. My guess, base on my knowledge as an unpaid collector of VAT, is that the new rate will come into effect on 1st December. VAT is an extremely complicated tax to administer at the best of times and the change will create unproductive extra work for several hundred thousand small businesses and retailers. By 1st December my own business will be two thirds of the way through my VAT quarter. Meaning that some of my VAT will be charged at the old rate and some at the newer. I suspect I will be required to make two separate VAT returns for the quarter.

Chancellor Cuts Tax for Basic Rate Payers

Chancellor of the Exchequer Alistair has cut income tax for basic rate tax payers. He has done so by raising the basic rate threshold to £6,025. This is particularly advantageous for ow earners, many of which have been penalised by the 10p tax rate.

The cut is effective for the whole of the 2008/9 income tax year, although most tax payers will have to wait until September before they see any change to their take home pay. It appears that higher rate tax payers will not benefit from the move, as adjustments will be made to the higher rate threshold.

The cost of the move is estimated to be £2.7 billion. The Conservative Party have attacked the move on the basis of the timing. The Government faces a crucial by election on Thursday - just two days after the announcement.