Thursday, 7 July 2011

Social mobility (2) - Taxation

Following on from my short thesis on a minimum wage allowance I want to devote some time to taxation. Again, these figures are based on the UK budget (2011/2012); GDP and government expenditure including welfare and pension, defence, local government, education, administration and health.

In total, government expenditure in 2012 is forecast to be £702 billion from a GDP of £1,547,624,656,480 which accounts for 45 percent of GDP. £702 billion pounds therefore needs to be generated from tax revenues including V.A.T. and other tax sources where there is a shortfall government borrowing must needs to be offset against future GDP. Whilst it is evident that a limit cannot reasonably be put on government borrowing because of events like war, recession and depression where government spending may need to increase nonetheless a ceiling is advisable so as not to bankrupt the economy. Government spending cuts should therefore be implemented so in order to offset fiscal stimulation in an economic downturn and increased military spending in times of war (most likely only in the time of a very substantial military commitment). Government borrowing in the UK is currently paid down at £40 billion per annum (as of 2012) which is 2.6 percent of GDP and this is an admirable rate at which to pay down debt although it is noted that there will be much grumbling about paying paying back so much debt so quickly if it is the case that the debt burden is heavy to GDP and/or growth is slow or retarded. In austere times given spending cuts in all reasonableness it appears to me that borrowing should never exceed 10 percent of GDP in any given year and in such a case should not be sustained for a period of more than 24 months. In times of normal economic growth government borrowing should be no greater 2.5 percent of GDP I am taking into account the fact that as an economy grows the debt payment shrinks in real terms which means in essence money for nothing if only a small amount of money is borrowed in comparison to GDP and growth. I am also taking into consideration what is known in economics as 'the paradox of thrift' which suggests that borrowing for expenditure is advisable in the event of good times as well as bad because in good times people are able to accumulate wealth and hold on to some of that wealth in savings, which is counter productive to growth.

The number of people in employment in the UK is 29.6 million, which is 49.6 percent of the total number of citizens. £1.5 trillion pounds worth of wealth created divided by 29.6 million people with a government spending burden of £702 billion per annum equals a £23,716 per person per annum tax burden. Offset the revenue generated through V.A.T, corporation tax, inheritance tax,capital gains tax, national insurance and other duty taxes, the amount that needs to be collected in income tax amounts to something like £4,747 per person per annum. In reality the tax burden is spread widely and fairly across the spectrum of earners with higher earners contributing more tax.

So in order to promote industry and reduce unemployment the minimum wage should be set at £7.28 per hour, however in addition to this and so in order to promote work and growth there should be a tax allowance of £10,000 per person per annum before one pays any tax. The lost income to the government can be compensated for by raising an additional capital gains tax of 40% on inherited estates from the deceased worth £1 million or more. Such a tax should be enforced without exception.

Existing income tax bands should be thus:

£10,001 - £35,000 = 22 percent tax
£35,001 and over = 40 percent tax

This will leave a small surplus in the requisite amount of income tax required to furnish government spending. This should be reinvested into apprenticeships and other training facilities for the unemployed. To take the sting out of consumer item price inflation or open market currency inflation resultant from the likely price increase in consumer goods and services caused by a rise in the minimum wage I presume that it would be advisable to pursue a less aggressive corporation tax strategy in any event I suspect that a reduced rate of 22 percent would have the effect of increasing the size of the economy there is the likely interest from international businesses looking to relocate for the tax benefit derived therefrom, rather than a scenario where foreign investors buy up static investments like property where there is no worthwhile benefit gained however the cost of living increases for subsequent generations. One must also take into account that if the minimum wage is increased less tax payers money is likely spent on benefits to the unemployed indeed more tax revenue will be generated through income tax, national insurance and V.A.T.

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