Every day in the news, we hear about the stark state of government funding in the UK. From schools and social services, to the NHS and local government services, there is not enough money to support the needs of society.
In 2010, the outgoing Chief Secretary to the Treasury, Liam Byrne, left the following note on the desk for his successor “Dear Chief Secretary, I'm afraid there is no money. With kind regards - and good luck! Liam.” His successor David Laws, a Liberal Democrat, published the note, believing the public had a right to know.
At the time, Prime Minister David Cameron used the notes to argue that Labour would increase taxes to replenish public finances, which were in a sorry state thanks to the recession and higher demand for benefits. Byrne wasn't wrong either. Debt was higher than it had ever been and HMRC revenue was down.
Taxes: A downward trend
Despite the recession, taxes have continued in a downward trend since 2010. Historically speaking, taxes - both Corporation and income tax - are lower than they have ever been. During and after World War II it was briefly as high as 99.25% and then reduced to 90% throughout the 1950s.
A Purchase Tax was also applied, before VAT existed, which was as high as 66⅔ % - and was applied at the point of manufacture or distribution, depending on how high-quality the goods in question were. Other taxes, such as Income Tax, were also used to generate revenue for the Treasury.
It wasn’t until the Thatcher era when taxes started to reduce dramatically. In 1971, the highest rate of Income Tax was 75%, with it going as high as 83% in 1974 on incomes over £20,000. Taxes on investment income was 98%, making the UK an unattractive country for overseas investors and entrepreneurs.
Conservative Prime Minister Margaret Thatcher and her government preferred indirect taxation. They wanted to make the UK attractive again for inward investors, entrepreneurs, professionals and the financial services sector. To achieve these aims, taxes had to go down. Basic and top rates of income taxes reduced to 30% and 60%, respectively, depending on what people earned. Investment surcharge tax was abolished and successive governments kept cutting income taxes until it was 23% when Prime Minister Tony Blair came into power in 1997. Labour chancellor Gordon Brown, continued the downward Conservative trend, as have governments in recent years.
What could we see in the future?
Right now, the case couldn't be clearer that vital public services need more money. At the same time, rates of taxation are lower than they have ever been. The personal allowance is £12,500, basic rate at 20%, higher rate is 40%, and for those earning over £150,000, the additional rate is 45%. Corporation Tax is 19%, reducing to 17% in April 2020.
People and companies are used to these rates of tax. With a minority government, the chances of the Conservatives forcing through higher taxes are slim, despite the demands on public finances. As we saw when Chancellor Philip Hammond attempted to increase Class 4 national insurance by 1%, tax payers weren't happy and it was soon reversed.
Annual investment allowance rates are high, for at least the next two years. This investment allowance has increased from £200,000 to £1,000,000 for two years, from 1 January 2019. Although it will only impact 0.75% of UK companies, all businesses need to be careful when making capital purchases in 2020/21 to benefit from this temporary increase, otherwise it could end up expensive when the allowance reduces back down to £200,000.
Lower taxes stimulate investment. However, with the public and businesses already unhappy with the government, new ways need to be found to increase Treasury yields. A major spending review is being undertake this year to look at solutions and examine how public finances are spent.
One way to increase revenues would be to tax larger companies, in particular those owned outside the UK and online retailers, such as Amazon, a higher rate whilst reducing taxes for smaller businesses. It would level the playing field and increase tax receipts. More people are calling for larger companies to pay what they really own. Maybe that is one solution to several problems?