Join LPUK link

 

Abolishing Income Tax

Income Tax, like much of the badly thought out legislation brought forward by modern day governments, was initially "sold" to the public as a temporary tax, something that was needed simply to deal with a specific pressing problem—the financing of the Napoleonic Wars.

However, as governments over the years became accustomed to having the tax provide a useful revenue stream, all pretence at hypothecation vanished—the Income Tax became a part of our daily lives, which most people now accept unthinkingly.

Below, we'll demonstrate that this neither need, nor should, be the case.

The Libertarian Party's proposal to abolish personal Income Tax will yield real benefits:

How Did We Get This Tax?

First, a little history. At the end of the 18th century, Britain was facing a serious threat from French military forces under the control of Napoleon. In 1799, Pitt the Younger introduced our first national Income Tax, as "a temporary measure" in order to fund those wars.

With a starting rate of just under 1%, Pitt's tax was modest by today's standards, but still deeply unpopular. Following a cessation of hostilities, Pitt's successor, Addington, repealed the Income Tax. Unfortunately, war broke out again and, in 1803, Addington was forced to reintroduce the tax.

In 1816, a year after the Battle of Waterloo, Addington once again repealed the tax—Napoleon had been defeated, and the justification for the tax no longer existed. In a move that sets a precedent that the modern day Libertarian Party would follow, all Income Tax records were then collected, cut into pieces and pulped.

For almost 30 years, Britain was again free of Income Tax. This came to an end in 1842, when Peel reintroduced the tax.  Peel's proposals were very much aimed at taxing only the wealthy in society and, by simultaneously cutting customs duties, he ensured that the less well off actually benefited from his taxation changes.

Although there was earnest talk throughout the remainder of the 19th century about repeal of the tax, it remained in place, largely unchanged, until the First World War. At the outbreak of hostilities, the standard rate of tax was still a modest 6% but, just 4 years later, this had risen to 30%. The modern Income Tax regime has altered little since.

A Misuse Of Funds

As can be seen from the above, Income Tax was initially intended to be levied simply to deal with a pressing national emergency. Even when the system was extended to peacetime by Peel, the net effect was an actual reduction in the tax burden for many in society.

However, since the First World War, successive governments have continued to spend the money originally earmarked for our national defence upon other projects, without any concern for the damage that this has actually done to our economy.

Governments are horrifically inefficient at spending public money. It has been estimated that for every £1 in tax that you and I pay, only approximately 50% of it is returned to front-line services, once it has been through the bureaucracy of government. This means that if we were purchasing our child's education or healthcare direct, we would get twice as much value for money than our tax funded government achieves.
 
It also doesn't take much thought to realise how using our money directly would generate huge benefits for Britain's wider economy. The desk-bound bureaucrats would lose, but real people and real businesses creating real wealth would benefit from the full purchasing power of your £1. The Libertarian Party believes in putting our broader economic interests ahead of those of the State—do you?

Hardest Hit — The Poor

Although the great parliamentarians of the 19th century understood and cared about the needs of the very poorest in our society, these concerns are obviously not felt by their modern day counterparts. Today, the Income Tax regime has such a disadvantageous effect upon the poor that we've even got a phrase to explain their plight—"the welfare trap". Those with the lowest earning capacities in our economy can face effective marginal tax rates of up to 95%—hardly a great incentive to get off benefits and back to work.

The efforts of our current government to alleviate this situation have been focused on the much maligned Tax Credits system. Open to abuse—and so, naturally, roundly abused—this system is designed to redistribute funds to the poor in society, largely to make up for money previously taken from them in taxation! As ever, government loves micro-managing people's lives, so it hasn't occurred to our current leaders that if we simply removed the problem—the Income Tax itself—we wouldn't actually need the cumbersome and costly solution of a Tax Credits system. Never mind "joined-up thinking", it would be nice to see some common-sense thinking from our politicians.

You'll Slash Public Spending!

Actually, no. According to government statistics, Income Tax raised £143bln in 2006/07, which accounted for approximately one quarter of the total government spending of £534bln (public sector current expenditure plus net investment). However, consider this: in 2001/02, the equivalent government spending was £378bln. Were we to return to those recent levels of public spending, we would have more than enough income from other sources to immediately abolish Income Tax.

Have the improvements to our public services since 2002 really been worth 40% of everything that you've earned? Could you have got better value buying these services directly, leaving your family better off?

Looking back at 2001/02 spending levels provides a graphic example of how wasteful government spending truly is. If we were to return to those levels, even after the abolition of Income Tax there would be £13bln remaining—sufficient to also abolish, at current revenue levels, Inheritance Tax, Capital Gains Tax, and duty on beer and wine, with some small change left over!

Implementation

Maintaining the cosy fantasy that Income Tax is still only "a temporary measure" (in Pitt's original words), parliament enacts annual legislation in the form of a Finance Act to allow it to be collected during the coming year.

In its second financial year in government, the Libertarian Party will halt this process, abolishing personal Income Tax. We will also repeal the appropriate portions of the Provisional Collection of Taxes Act 1913, which allows for the collection of revenue even for a tax that no longer legally exists.

Such a major change would obviously have temporary repercussions for staff of Her Majesty's Revenue and Customs. It is partly out of consideration for them that we propose giving notice of our intent upon first gaining power; this will both enable administrative changes (e.g. to PAYE systems) to be comfortably made, and also provide HMRC staff time to seek other employment.

The abolition of personal Income Tax would be a lasting achievement; it would be a brave or foolhardy government indeed that would attempt to reintroduce it. It is a policy which makes sound economic sense, would benefit everyone in our society—and in particular the poorest—and would help curb future government excesses both in spending and the amount of control that the State could exercise over us.

The abolition of Income Tax is the right thing to do, for us and our economy. Help us make this proposal a reality.


Sources
HM Revenue & Customs: A brief history of income tax
HM Revenue & Customs: Table 1.2 Annual Receipts
HM Treasury: Public Finances Databank
Department for Work and Pensions: Tax benefit model tables 2007