Why Does Great Britain Have a Progressive Income Tax System Instead of Taxing Everyone at the Same Rate?

Great Britain's income tax system is often viewed as a model of fairness and efficiency, with a progressive structure that taxes higher earners at higher rates. This approach contrasts markedly with a flat tax system, which would levy the same rate of taxation on everyone, regardless of their income level. The fairness and effectiveness of Britain's progressive system have been subjects of debate, especially in light of recent political proposals and discussions. This article explores the reasoning behind the nation’s progressive tax system and its implications for societal and economic equity.

The Fairness Argument of Progressive Taxation

A progressive tax system is inherently more equitable because it takes into account an individual's ability to pay. Under such a system, those who earn higher incomes are taxed at higher rates, whereas those on lower incomes pay a lower percentage of their earnings in taxes. This approach is often justified by the argument that those who are more affluent have a greater capacity to contribute to public services and societal welfare.

For example, the UK's tax system allows the first ￡12,800 (approximate value) to be tax-free. Beyond this, earnings are taxed at 20%, but when revenues exceed ￡50,000 per annum, the rate increases. While these figures may vary slightly each year, the principle remains clear: the system aims to be fair by taxing the wealthy more heavily. Consider the stark difference between an individual earning ￡200 per week (approximately ￡10,400 annually) and someone earning ￡200,000 per week (￡10,400,000 annually). The latter individual has a much greater capacity to contribute and is, therefore, taxed more.

The Critique of Flat Tax Systems

A flat tax system, on the other hand, levies the same percentage of tax on all earners, regardless of their income level. This approach has been criticized for its lack of fairness, as it can place a disproportionate burden on those with lower incomes. The argument goes that a flat tax system may lead to a regressive tax burden, where low-income individuals pay a higher percentage of their income in taxes compared to higher-income earners.

For instance, if a flat tax rate of 20% was applied to everyone, a person earning ￡10,400 annually would pay 20% of ￡10,400 (approximately ￡2,080) in taxes, which is a significant portion of their income. However, the same 20% rate would apply to someone earning ￡10,400,000 annually, where the tax would be ￡2,080,000, but as a percentage of their total earnings, it is much less burdensome.

Political Proposals and Their Implications

Recently, discussions have arisen about potential changes to the UK's tax system. Notably, Rishi Sunak, a prominent Member of Parliament, has suggested the abolition of National Insurance, which is currently levied primarily on employers, and the incorporation of this tax into the income and corporation tax system. While this proposal is not entirely clear, it has raised concerns about its potential impact on workers and employers.

Sunak's proposal suggests that employers might increase wages, but this is not guaranteed. In fact, the analysis suggests that such a move would not have a beneficial effect on workers. Instead, it may lead to an increase in corporate profits at the expense of worker pay.

Comparison with Other Nations

It is natural to compare the UK's income tax system to other nations to understand its effectiveness. The United States, for example, also has a progressive tax system, which is designed to address the same issues of fairness and equity. The U.S. tax brackets and rates vary based on income, ensuring that higher earners at higher rates.

While the exact details of the U.S. tax system may differ from the UK's, both nations recognize the value of a progressive tax system. This shared approach suggests that many countries see the benefits of taxing higher incomes at higher rates to fund public services and support those in need.

Conclusion

The UK's progressive income tax system is a cornerstone of its tax policy, designed to ensure fairness and equity. By taxing higher earners at higher rates, the system aims to balance the burden of taxation and ensure that those with the ability to contribute more do so. While there are valid criticisms and proposals for change, the core principle of progressive taxation remains a fundamental part of the nation’s financial strategy.