When taxation is unfair
Nigel Farage and Reform UK have a real chance to differ from other parties by making the case that taxation should be fair. They can point to several taxes that are unfair and should be changed.
When UK people buy whisky, they pay for the drink in the bottle and the alcohol duty on it, and are then charged VAT on both. They are thus being charged a tax upon paying a tax. Not surprisingly, many people rate this as unfair. In the UK, taxes often make up 60–75% of the retail price of a standard bottle of whisky, depending on price level. For cheaper bottles, the tax share is even higher.
When you buy petrol or diesel, the price per litre includes three main components: the base fuel cost of crude oil, refining, distribution, and retailer margin. Then there is the fuel duty, currently 52.95 pence per litre. On top of these is added VAT at 20%, which is applied to the entire final price, including the fuel duty. As with whisky, people are being taxed for paying tax; a tax upon a tax.
Many economists, investors, and policy commentators argue that taxing nominal capital gains rather than inflation-adjusted (‘real’) gains is unfair, because it can result in tax being charged on gains that only exist on paper because of inflation.
For example, if you buy shares for £10,000, and inflation over time is 30%, when you sell your shares for £13,000, your nominal gain is £3,000, but your real gain (inflation-adjusted) gain is £0. Nonetheless, CGT is charged on £3,000, even though your real wealth has not increased. This is clearly unfair.
When income tax thresholds are not adjusted for inflation, it means that people are dragged into a higher tax bracket and pay more taxes even though they are no richer in real terms.
For example, suppose that inflation is at 10%, and your salary rises from £50,000 to £55,000. Since things cost 10% more, your real income has not increased. If the higher-rate tax threshold stays at £50,270, more of your income is taxed at 40%, so you pay more tax, despite no real improvement in living standards.
This is called ‘fiscal drag’ and is widely regarded as unfair. Governments do it because, unlike explicit tax rate increases, governments do not need to announce higher rates. This is why it is called a ‘stealth tax.’
UK taxpayers face a strong incentive to keep their income below £100,000 because of the way the Personal Allowance is withdrawn above that level. This creates an unusually high effective marginal tax rate between £100,000 and £125,140. Normally, UK taxpayers get a Personal Allowance of £12,570, which is tax-free. But once your income exceeds £100,000, the allowance is reduced by £1 for every £2 of income above £100,000. This continues until the allowance reaches zero at £125,140.
For example, suppose your income rises from £100,000 to £101,000. Your extra income is £1,000. That £1,000 is taxed at 40%, taking £400. But because their Personal Allowance reduced by £500, that £500 is now taxed at 40%, taking £200 in extra tax. Your total extra tax is thus £600, and you keep only £400 of the £1,000. You are paying income tax on the additional income at 60%, an extraordinarily high marginal rate.
By proposing to remove unfair taxes such as these, Reform could open up clear blue water between it and the other parties - a margin that would be widely welcomed.
Madsen Pirie