Martyn Gowar TEP is a Partner at McDermott Will
& Emery LLP and is an Editor of the STEP Journal
I do hope you will appreciate that I am not being political in
my article this month, but all the main UK parties, and for all I
know all the minor parties, are agreed that, at least in the short
term, tax rates have to go up to produce some of the shortfall in
government receipts. My concern is that I have heard not a word of
debate about what is an appropriate cap to the level of taxation to
which an individual should be subject. Are we to get to a stage
where the government takes all income in taxation and then hands
out an allowance, pocket money if you like?
In the UK we have been here before, and it is true that in the
late 1960s, when the top rate of tax on investment income stood at
98 per cent, there was added in one tax year a Special Charge,
which took the rate on investment income to over 100 per cent. It
will come as no surprise to note that (in that year) those of
independent wealth financed their lifestyles by selling their
capital assets. Capital gains tax (then at a rate of 30 per cent)
only applied to a gain since a base date of 1965 so there was
little practical tax charge in that year.
So starting in the 1980s, tax rates dropped dramatically to the
top rate of 40 per cent with which we have lived for 20 years and
more until now. Let us remember, however, that those high tax rates
of the 1960s were accompanied by much larger income tax allowances.
Interest on loans (particularly to buy or improve property) was
much more widely tax deductable, life insurance and assurance
premiums were relievable, there were child allowances, there was
the married persons allowance and unlimited payments into pension
funds were also allowable.
Now we look at tax rates that have very little in the way of
reliefs. The withdrawal of those allowances was a tax increase in
reality. For example, when the married persons allowance was
withdrawn, the yield of tax was equivalent to more than a penny on
the basic rate of income tax. But we were mollified by the fact
that the headline rate of tax remained at its comparatively low
level.
However, it is my sense that people are now much more sensitive
to some of the ruses that are being invented. In particular, the
withdrawal of the personal allowance for those with taxable income
over GBP100,000 means that in that margin of income, taxpayers are
being taxed at a rate of over 60 per cent. That is before we look
at the effect of rising National Insurance charges, which we all
know are an additional employment tax, and we note the reduction of
relief for payments into pension funds. At the same time, the
capital gains tax rate has been reduced to 18 per cent. Is this not
going to be the late 1960s all over again? Those taxpayers who feel
this is too much (and it is a personal matter as to where each of
us draws the dividing line) may decide that they will try and
convert income sources into capital assets so that they do not pay
at what they consider a level of tax that is unacceptable.
Governments, not just in the UK but around the world, have made
self-righteous protestations about the need to attack tax avoidance
and certainly, when I look back to the 1970s, the artificiality of
many of the schemes that were proposed was, and I speak personally,
deeply unattractive. But over the past few years, governments have,
to raise revenue, been taking more and more from taxpayers to fund
ever-increasing commitments. And local authorities, being squeezed
by central government, are thinking up new ways to raise revenue.
It all has to come from the taxpayer’s pocket.
I am sure that there has to be a stopping place and, if it is
not recognised, then we will find an explosion of tax mitigation
schemes and a return to a much more widespread black economy, which
would be damaging to us all. There is, I suspect, in all taxpayers
something of the words of General de Gaulle (and I will not attempt
to do the French!). He said ‘This animal is nasty – when you attack
it, it defends itself!’