In this article I want to talk about a very important topic which can be called the steering wheel of any economy and its the Tax system. Its very important because it affects individuals choice over work and leisure or even making the decision of whether to stay unemployed or find employment.
These choices lead the path of our economy in terms of investment and the future work ethic of this nation.
Lets look at the purpose of a tax and what’s it intended for so we can see whether our system is on the right track. A tax is usually used to discourage things by making it more expensive or less worthwhile so less of it used or done so with that definition in mind, surely income tax is a tax on earned money and by taxing an earned income, the government is effectively discouraging employment and work. So this will create disincentive to find work because you have to pay a tax on it but income tax is not intended in this way. An income tax is used to fund public services and merit goods which is necessary to have a functioning public sector. I believe that we need a public sector and it should be fully functioning in order to preserve law and order and provide a safety net for those in need(I will touch on this in the next post). Therefore it can be concluded that an income tax isn't really a tax on employment and isn't meant to create disincentive for finding employment etc and its for funding government spending.
However, under the current system, it does create a disincentive to find employment and discourages people from earning more and becoming successful and it seems as if you are earning more, you are doing a bad to the society instead of good. This system is called “The progressive tax” system. Under this system, as your earnings increase, you will pay a higher proportion of your income as income tax. So from the point of view of someone entering the labour market as a newbie, he is discouraged from working harder and earning more because as he earns more, he has to pay a higher proportion of his/her income as income tax to the treasury. Going back to our definition of income tax this surely doesn't make any sense because we want our public sector to be funded, not to penalise those who earn more. Lets look at an example to show why this is wrong. Suppose you are a sales assistant in a supermarket and currently earn less than £9000 and you suddenly get a promotion which means you will earn £22,000. You are fine, you will need to pay only 20% of your income as tax(excluding national insurance contributions). In a few years, you have been given the job of an area manager and your salary is £65,000. Now you need to pay 40% of your income as tax. Now that you are earning £65,000 and paying 40% income tax, is it because you are using the NHS and the police and the fire department more than when you were earning £9000? Of course not, you may even be using less public services such as NHS due to having a private health insurance which takes the burden away from the government, so in fact you are helping the government to save money yet instead of rewarding you for this, they are penalising you for this! This is unfair because you cant keep hold of your very hard earned money.
I know what you are thinking now, what about income equality? Income equality is a very interesting topic which I wont be able to include in this article but will touch on it very briefly. Believe it or not, progressive tax system is unfair to the poor more than the rich! Because it stops them from going up the income ladder because as their incomes increase, they have to pay a higher share of tax and as soon as they face this, they get frustrated and start to blame the rich. Yes, the poor is right! They want to get to where the rich is but the system wont allow it, in other words, our tax system tackles the inequality the wrong way around. Instead of encouraging the poor to earn more, they try to make the rich poor. In both cases we have income equality but the difference is that in one of these systems, we have an opportunity society which rewards going forward and in the other we have a society where earning more is a bad thing.
So in conclusion, our tax system doesn't reward anyone, Nor the rich or the poor but yet it was intended to make the society more equal, in fact despite its attempt, it has tried to make incomes more equal but look what its done.
We need to have a flat rate of income tax where our public sector is funded, working harder and earning more is encouraged and most important of all, laziness is discouraged.