2.2.2 Setting Income Tax rates

Watch the UK Chancellor of the Exchequer, George Osborne, being interviewed on the BBC by Andrew Marr. This interview took place in 2012 and debates the cut in the additional rate of income tax (on taxable incomes above £150,000 annually) from 50% to the current rate of 45%.

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GEORGE OSBORNE

My priority is to help low and middle earners. That is where the bulk of the effort in the budget is going to be. We want to see real and substantial progress on lifting low income people out of tax. We have already a million low income people out of tax and helping working families; the people who get up in the morning, go out to work, try and provide for their family, the people who are looking for jobs if they have lost jobs. Those are our priorities in this budget and I think people will see on Wednesday that is where the bulk of the measures are directed.

ANDREW MARR

Gordon Brown, Ed Balls created the 50p top rate. Has it worked as a tax?

GEORGE OSBORNE

Well we are going to get an assessment in a couple of days' time from the Inland Revenue.

ANDREW MARR

You haven't seen it yet?

GEORGE OSBORNE

Well I have seen it but I'm getting to it.

ANDREW MARR

So I'm asking, has it worked as a tax?

GEORGE OSBORNE

We'll just have to wait for that assessment from the Inland Revenue and of course all the forecasts, including the forecast of what taxes raise are signed off by the Office for Budget of Responsibility. Ed Balls (I was just watching him on your program) made a mistake there. He said, 'Why have I asked the Inland Revenue to assess these things?' Well first of all they are not a bad group of people to ask because they're the people who actually see the tax returns, but any forecast for the taxes already being levied is something that is now produced by an independent body. I know that is completely alien to the treasury that Ed Balls was in, but we do have an independent referee on the measures we take and indeed on the measures that are already in existence.

ANDREW MARR

But I come back to my first thing because you have seen the figures, I'm just wondering if you think it has worked as a tax, if it has been an effect tax in terms of the amount it costs to collect and how much you get back?

GEORGE OSBORNE

Well I just don't think I should talk about specific taxes. This will apply to any of the taxes you ask me about today just a couple of days before the budget. I think that is right that I unveil what we are doing, what we are not doing on budget day.

ANDREW MARR

Yes, because I mean, as you know, the opposition all sorts of people are sort of hoping that you are going to cut the 50p rate because they can then jump at you there and say, 'look Conservatives look after their own, they look after the rich.'

GEORGE OSBORNE

Well, as I say, the bulk of the measures in the budget are going to be targeted, working people on low and middle incomes. That is our priority. What we want to do is make sure that this country earns its way in the world. We have secured this country's economic stability with our plan to reduce the debt and deficit which I think has been completely vindicated by events over the last year on the European continent. What we've got to do now is say look Britain has got to earn its way in the world and we have been cosseted over the last decade by high debts, with cheap finance, with the boom in the city of London. You know those mask the fact that Britain was becoming less and less competitive, sectors of our economy like manufacturing were shrinking. We have got to turn that situation around, you know. The illusion of the cheap money is over and now Britain has to go out there and graft and earn its way, create wealth and prosperity in a very competitive world.

ANDREW MARR

Whether we actually use the term tycoon tax or not is there also a general determination to insure that because people can afford expensive accountants that they've been able to avoid paying tax in all sorts of different ways and there should be some sort of ceiling or floor rather on the amount of tax people pay?

GEORGE OSBORNE

Well again, I can't be too specific about things in the budget but I'm very clear that people should pay a fair contribution to the government. You know I use the phrase, 'We are all in this together' because I wanted to make sure that the better off people in our society did make a contribution and as I say it is not just the tax rate they pay, it is whether they are actually paying. It's not just the tax rate it's whether they are actually paying the rate and we are going to take measures to make that the loop holes and some of the reliefs in the system are not exploited.

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The social and economic backdrop to the issues discussed in the interview are important.

First, taxes (together with state benefits which you look at later in this week) represent an example of the interdependence between the individual and the broader social and economic environment in which they live. Taxation funds state benefits, such as state pensions and social security benefits, and pays for public services such as the National Health Service (NHS).

Second, the UK’s tax and state benefits system also has the effect of some redistribution of income – some of the taxes raised collectively are transferred back to individuals and households. Of course, the people receiving benefits will often be different from those paying taxes such as Income Tax, but many people will pay tax and receive benefits at different stages in their life course. The availability of state benefits is also an important part of the way that people cope with unexpected events, which you’ll examine later in the course.