Saturday, 24 March 2012

Regressive Taxation

Now I don't claim to be no expert on taxation despite having studied economics some years ago but its pretty obvious that this budget is in fact a 'regressive budget' ( a regressive tax imposes a greater burden on the poor than on the rich), probably one of the most regressive budgets I recall. Without complicating matters or jumping on the 'granny' tax bandwagon let's just consider income tax rates:

In 2013/14 the basic rate allowance will be reduced by £2,125, which means that in 2012/13 you could earn £34,370 before paying 40% tax, but in 2013/14 you can only earn £32,245 before you start paying 40% tax which means that more people will be paying higher rates of tax on lower incomes.

Compare this to the reduction of a 50% tax rate on incomes over £150,000 to 45% in 2013/14, a situation which exactly opposite to the above... these people will be paying a lower rate of tax on higher incomes.

The argument for the reduction in the 50% rate is two fold, the tax doesn't raise a lot of revenue and secondly its to encourage entrepreneurship and investment in the economy; but what about those on lower incomes, don't they save, don't they invest through funds in businesses? Of course they do but all this budget has done is reduced their disposable income and consequently the 'savings rate.'

It is a situation that will undoubtedly come back to haunt Cameron and Osborne.

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