Taxation is imposed in almost all countries to defray the cost of public expenditure. Taxation is important as the main form of government revenue in most countries. It is also used as a fiscal device to control and regulate the economy of a country. Another device that is used for this purpose is interest rate.
The fiscal system in many countries is heavily dependent on its tax system and administration and is used to regulate the economy in large measures. This is inevitable in any civilised country, but the impact of taxation varies from country to country; some have very high rates of tax, in particular income tax, and some have a moderate or very low rates. There are a few small countries or dependent territories with no income tax.
This article deals with income tax which applies to individuals as regards income from all sources, including dividend-type income.. Corporation tax was introduced in 1965 and applies to the income of incorporated bodies (before 1965 companies were subject to income tax as if they were individuals).
The History of Income Tax
Income tax was first imposed in 1799 by William Pitt, Prime Minister, to raise funds for war expenditure (the Napoleonic Wars) and was intended as a temporary measure. It was repealed in 1802 by the succeeding Prime Minister, Addlington, who in 1803 introduced a new income tax based on five Schedules (A, B, C, D and E) which largely continue to be used as the tax structure in administering the tax today, though in recent years the word, Schedules, is no longer in use. Addlington can be regarded as the true founder of the income tax system as he was responsible for more widespread taxation at the source, i.e., the tax was deducted at source regarding salaries, rent and pensions.
Income tax was again repealed in 1816 and was reintroduced in 1842 by Robert Peel, Prime Minister, who also introduced penalties into the income tax system. A fixed penalty of £50 was imposed on any taxpayer found to be “neglectful” in filing his tax return. This specific penalty was abolished in 1923 but today penalties are normal for the administration of the tax system, in addition to interest charges for late payment of tax.
Gladstone (Prime Minister) was aware of the limitations of income tax, especially self- assessment leading to widespread fraud. In view of this he extended the legacy duty so that on the death of their owners land and businesses were subject to tax. He intended to phase out income tax by 1860 but for various reasons was not found to be feasible, but instead the tax rate actually rose due to the escalation of the costs of public expenditure.
In 1907 Asquith, the Chancellor, introduced a system of personal allowances and in 1908 old-age pensions were introduced. In 1909 Lloyd George introduced the first progressive tax on income that became law in 1910. The First World War led to the top income tax rate being raised to 15% (called “supertax”), though still not enough to fund the War and the deficit was met by borrowing by means of War Bonds, etc. In 1928 supertax was renamed surtax and income over £5,000 was taxed at 8%. The
present PAYE system was introduced in 1944 to enable a deduction from wages at source. After the Second World War the top rate of tax was raised in 1946 to 52.5% on incomes over £20,000 per annum.
In 1979 the top rate of income tax on earned income was 83% and unearned income over £5,500, such as dividends and rents received, was subject to an investment surcharge of 15%, which increased the top rate of tax to 98% for a small number of taxpayers.
Income tax has not only remained over the centuries but its impact has greatly widened. At one time the tax for the highest earners was as much as 98%, meaning that for any additional pound earned by such earners they would get only 2p. Fortunately, this is no longer the case. The top rate was reduced to 40% some years ago, but due to the recent financial crisis forcing the government to bail out the major banks an additional rate of 50% was imposed in respect of those earning in excess of £150,000. The 50% rate has been reduced to 45% from 6 April 2013.
Income tax is the single largest source of tax revenue for the government. In 2008-09, the figure reported in the 2008 Budget was £155 billion. National insurance contributions came second at a figure of £104.6 billion followed by VAT in third place at £83.8 billion. The latest figure for VAT is £100 billion.
The ethical understanding of income tax in the UK is left up to the reader.