Taxing Times Ahead: ?Tax increases for those that can afford them? (Alistair Darling)


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In the mid-80s global tax competition intensified leading to a trend for cutting top marginal income tax rates. Today, largely thanks to the economic downturn, tax rates for higher earners are

In the mid-80s global tax competition intensified leading to a trend for cutting top marginal income tax rates. Today, largely thanks to the economic downturn, tax rates for higher earners are rising again.

There is increasing popular pressure on wealthier citizens to shoulder a larger share of the burden, with more countries considering increasing taxes for higher earners.

For example, in Germany the Social Democratic Party is using a proposal to increase the tax rate on the rich by 2% as part of its electoral campaign. There is even some unease in Switzerland, the popular destination for tax exiles, over tax privileges for the wealthy.

In the UK, the April Budget announced a 50% tax rate for top earners. Now middle class families are also bracing themselves for higher taxation after Chancellor Alistair Darling pledged ?tax increases for those that can afford them?, which could affect VAT, income tax and national insurance rates.

VAT was reduced from 17.5% to 15% on 1st December 2008 to stimulate consumer spending. This was only scheduled until the end of 2009 and it looks unlikely to be extended. Some Westminster insiders even believe it would be hiked to 20%.

Speaking at the annual Mansion House banquet on 17th June, Darling told bankers that he had been ?very clear that support for the economy must be matched by action to ensure that we live within our means?. We said that just as the UK had been one of the first countries to recapitalise its banks, it is also one of the first to set out a plan to reduce borrowing – specifically to cut the deficit in half over four years. Tax increases in the years ahead will be needed to accomplish this, along with slower spending growth.

?No-one wants to put up taxes,? he said, ?but it is right to do it in a way that those who are able to bear the burden make the greatest contribution?.

Darling acknowledged that ?lower tax receipts, higher benefit payments and the costs of supporting the financial system have inevitably pushed up deficits and debt?, but he defended the government?s spending plans and tax stimulus, arguing that ?it is clear to me that to have done nothing, to have walked away, would have caused more pain, prolonging and deepening the recession?.

At the same event, Bank of England Governor, Mervyn King, warned that in five years time the national debt, as a proportion of national income, will be more than double its level before the crisis. He called on the government to provide a clear plan to show how prospective deficits will be reduced during the next parliament.

The latest figures from the Office for National Statistics (ONS), released the following day, would have been uncomfortable reading for the Treasury.

In May the UK budget deficit was more than 60% higher than a year ago – ?12.2 billion in May 2008 and ?19.9 billion in May 2009. Public sector borrowing reached ?30.5 billion for the first two months of the financial year, twice the level recorded at the same time last year. The May figure of ?19.9 billion was the highest figure since the ONS began keeping records in 1993.

In the Budget, the Chancellor had forecast that public sector borrowing would be limited to ?175 billion for the fiscal year 2009/10.

The country?s overall debt is a colossal ?774.8 billion, almost ?150 billion more than a year ago. It is equivalent to 54.7% of Gross Domestic Product (GDP), the biggest proportion for over 30 years.

In February, the ONS had said that it now considered both Lloyds Banking Group and the Royal Bank of Scotland to be public sector companies. In their view this took the total national debt to an unprecedented ?2.2 trillion, which is just under 150% of GDP. This would be the worst debt total since Britain was paying its war debts in the 1950s.

Chief UK economist at IHS Global Insight, Howard Archer, described the May figures as ?absolutely dire?. He said Darling has a ?major battle? in limiting borrowing to ?175 billion, ?although the current signs that the economy could be at least temporarily stabilising gives him hope?.

Archer continued, ?Whether or not he does hit his targets for this year, it is evident that further major fiscal tightening will be needed to get the public finances back to a sustainable state over the long term?.

The Treasury is in a situation where it is paying out more in social benefits (which rose 8% to ?13.5 billion in May, reflecting increased unemployment benefits), at the same time that tax revenues are plummeting. Corporation tax fell almost 27% in May, VAT revenues dropped 19% and income tax brought in almost 11% less than the same month last year.

The Budget in April had predicted that income tax and national insurance receipts for 2008/09 would show a shortfall of ?5.3 billion.

These figures do not include the significant loss of revenue from stamp duty, capital gains tax and inheritance tax, brought about by lower house prices.

Looking ahead, HM Revenue & Customs (HMRC) figures at the beginning of June predicted that the number of higher rate taxpayers in the UK would shrink by 25% – from 3.89 million in 2007/08 to 2.9 million in 2009/10. As a result income tax revenue is expected to contract by ?16 billion, from ?91 billion to ?75 billion, over the same period.

Following the Budget, the Institute for Fiscal Studies (IFS) had said that the government will have to raise ?90 billion a year to fill the black hole created by the economic downturn. This would mean that every family in the UK will have to contribute an extra ?2,840 in tax cuts or spending cuts every year, on a permanent basis.

It certainly does appear that the public will be called on to contribute, however unwillingly, to nursing national coffers back to health.

While this article focuses on the UK, other countries are facing similar revenue shortfalls as a result of the economic downturn, coupled with the costs of propping up banks and economic stimulus. Other European governments may need to turn to tax hikes, in one way or another, to help recover from the downturn as well as to pay for their increasing social welfare costs.

All this highlights the importance of ensuring you have the most effective tax planning strategy in place ? one designed specifically to achieve the best results in your country of tax residence.

The key to successful tax haven planning is to do it properly with careful advice, so you should seek professional advice from an experienced financial advisory firm like Blevins Franks.

By Bill Blevins, Managing Director, Blevins Franks

19th June 2009

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.