In 2017, the UK Government spent over £700 billion of taxpayers money. I don’t doubt that those handing over almost half their pay packets to the state expect something substantial in return. Yet almost £200 billion of these taxes — the largest share — went towards propping up the welfare state. The second largest portion went towards our crumbling NHS. I don’t really see a huge amount of incentive here for Britain’s professional class.
Still, no system is without its drawbacks, and what I am seeking to do is not to criticise nor sing the praises of the UK taxation system, but to rationally and neutrally consider the viability of the alternatives. Too often, this debate is tainted by a lack of objectivity and oversimplified into a clear-cut divide between the moral Left and the ruthless, capitalist Right.
What are the problems with the current system?
What cannot be contested is the fact that in this country, the 40 per cent tax bracket removes economic incentives for the middle class — who also happen to be the biggest contributors to the UK economy. The bulk of their taxes don’t go towards pensions, improving education standards or promoting employment; instead, most of this money is put into sectors which benefit lower earners — such as welfare — leading inevitably to a bloated state.
People often refer to those within that 40 per cent bracket as ‘high earners’. However, the term is arguably misleading. It is not ‘high’ earners, it is middling earners: professionals, doctors, teachers, lawyers, accountants — ordinary, hard-working people trying to pay off the mortgage and raise a family.
But is there really another option? I decided to investigate the taxation systems in other European countries to find out.
In Finland, a GP retains just a third of his or her earnings. Anyone with a salary of more than €47 000 has to give up 60 per cent of their income; anyone who earns more than €83 000 has to hand over 67 per cent of their earnings. Granted, in Finland, tuition fees don’t exist, dental care is free and the health care system puts the NHS to shame … but even so, perhaps our 40 per cent bracket is not quite as extortionate as it seems.
Meanwhile, in Spain, while the tax system is progressive like the UK’s, the threshold for the higher tax rate is much lower. Those earning €35 000 euros per annum or more (equivalent to £31 000) hand over 37 per cent of their salary — a much lower threshold than that of the UK.
However, while in Spain the majority of income tax is spent on pensions and promoting employment (which act as incentives), in Britain, only 12 per cent of public money is spent on the pension system. More Spaniards than Brits pay the higher rate, but the Spanish benefit from better pensions in the long run.
In Bulgaria, all income is taxed on a flat rate of 10 per cent, and its economy has experienced rapid growth since this tax reform was introduced.
So why not introduce a flat tax here? Well, as we have already established, no system is perfect. On face value, the concept of taxing everyone exactly the same seems to be the fairest system. However, switching to a flat tax would work out in favour of those who earn the most. Granted, this would stimulate economic growth, as is evident from the example of Bulgaria, but it would put low earners at a disadvantage, probably widening the poverty gap. It would also necessitate cuts to public services. What we have to ask ourselves is what sacrifices we are willing to make.
Where else do our taxes go?
As we have seen, the majority go towards welfare and healthcare — combined, they account for almost half of total public sector expenditure. But what about the rest?
Twelve percent goes towards education. Given that universities are largely privately funded, this seems about right.
About one per cent goes towards the foreign aid budget. A thorny one, granted, but most would probably agree that foreign aid is necessary and justifiable, as long as we make sure the money ends up in the right hands.
In spite of what the Mail would have you believe, only 0.7 percent of taxpayers money goes towards the EU budget.
Five per cent towards National Debt interest — quite a severe drain on our economic resources, but obviously a necessity.
So, ask yourself: do you think your taxes are being well spent?
Is the system fair?
Some people argue that the rich don’t pay enough tax in the UK. However, I think that 45 per cent (the highest bracket for those with an income of over £150 000 p.a.) is the most tax anyone should have to pay. Otherwise, where’s the incentive to shoot for the stars?
Moreover, what many do not realise is that four in ten adults in fact pay no income tax at all, because the point at which income tax has to be paid has increased in recent years. Currently, those with a salary of less than £11, 850 owe the state no income tax.
And in spite of my little rant about the lack of incentives for the middle class in my opening paragraphs, I think that overall — if we want an NHS, good quality state schools and council houses — we have to accept a reasonably high income tax rate.
So: a necessary evil or an unnecessary burden?
Thus, my balanced, neutral, carefully considered answer to this question is yes. We can justify a 40 per cent income tax rate for those who earn more than £46 000 per annum. If we paid less tax, our NHS probably wouldn’t survive, benefits would have to be slashed, and our pension pots would dwindle even more. If we paid more, public services would improve, but at what cost? I reckon we have the balance about right.
The best example to illustrate my argument is the debate surrounding UK tuition fees. People point to the Scandinavian countries as model examples for the rest of Europe, because education even up to university level is completely free. Yet although we pay for university through paying back our student loan, students in Scandinavia pay for it indirectly through taxes — once they land that high-flying job they slaved away at university to get.
I suppose the somewhat disheartening reality is that there is no such thing as a free lunch; you get what you pay for.