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Stage 1 Assessment Requirement

In April 2010 a new Additional Rate of tax of 50% was introduced for those earning over £150,000. In addition, a phased withdrawal of the personal allowance for those with incomes over £100,000 was also implemented. This top rate was reduced to 45% by the current Coalition Government, but with a general election due next year the debate surrounding the appropriate top rate of tax has re-emerged.

You are required to write a report to evaluate whether the introduction of a new additional rate of tax actually raised as much tax as was estimated by the Government; and whether theory of tax supports the concept of increasing the rate of tax for high earners.

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Stage 2 Introduction

The word “tax” means an amount that is levied by the central government on the incomes that are earned by the individuals or the citizens of the country. This money is then used to maintain the infrastructure, in providing the necessities to the citizens of the country and also, to finance new projects.

Stage 3 Impact of the proposed rate

It was criticized by those who had a higher income and were therefore, subject to a higher taxation amount. As a result of this increase in the tax rate, there was a response which can be bifurcated in the following two groups: The first group is concerned with the reducing the number of hours for which the people work and reducing the effort that they put in working. This is basically means that the people work for lesser number of hours and take more leisure time, so that at the end of the month, they end up earning less and paying up lesser income tax.  The overall effect of the levying up of this tax rate on the labor class would be negative.

Stage 4 Amounts that actually rose

The analysis by various researchers had shown that an amount which ranged between £16 billion and £18 billion of income was brought forward to 2009-10 to avoid the additional rate of tax. This corresponds to a one-off reduction in the potential yield from the additional rate of around £1.6 billion to £1.8billions, although the actual impact would be lower (around £1 billion) as this income would have been subject to greater behavioral responses had it been declared in 2010-11 or later when it would have been subject to the 50 per cent rate. 

Stage 5 The Laffer curve

Laffer curve is the curve that suggests the relationship between the economic activity and the taxation rate. It basically provides that there is an optimum rate of tax that would increase the taxation revenues. Any rate above or below that optimum rate would reduce the tax revenues.

Stage 6 Conclusions

The conclusion of levying higher taxes is quite uncertain since the behavioral aspects can never be known. But the actual amount that was collected was around €1billion which tells altogether a different story. The government never collected even half of the amount that it had anticipated when it levied the tax. This data was collected when 90% of the self assessment tax had already been filed. The tax rate made the people to migrate to other countries and the highly skilled labor that had ideas of starting a new business tried and tested their ideas in the other countries.