A return to 98% tax rates?

How much could taxes rise by after the next general election?

In 1975 public expenditure looked very different from today. Many industries, subsequently privatized, were under state ownership. However the big difference between now and 1975 is the level of national debt. Then it was £46.4 billion, or 43.8% of GDP (economic output). Today the national debt is £1,015 billion representing 71.9% of GDP. In addition there is an estimated £1,000 billion liability on unfunded public sector pensions.

Our public debt is currently going up at the rate of £178 billion per year. That’s the amount the Government is admitting to, but the figures could be even higher. Our economy wasn’t in great shape in 1975 but most companies were paying taxes. Today the tax take has decked markedly. The former biggest contributor, namely RBS, is now receiving government money instead.

So I think the burden is going to fall on individual taxpayers and current rates, even with the new 50% income tax band, will fall woefully short in balancing our budget. It is staggering nothing has yet been done to start to reduce the budget deficit, no doubt because of concerns of losing votes ahead of the next general election. I would suggest you look at the tax rates in 1975 and compare them with the proposed tax rates for 2010/11 for an indication of what might be to come.

Many readers will remember the punitive income tax rates of the 1970s. In 1975 there was also a tax called investment income surcharge: an extra 15% tax on any unearned income (e.g. interest from savings, dividends and rental income) over £2,000 per annum. This means anyone paying the highest rate of income tax to the best forex broker could have been taxed at a staggering 98%. It would not come as a great surprise to me if a future Chancellor decided to levy a similar surcharge.

Similarly, capital gains tax is likely to come under scrutiny. Currently levied at a flat rate of 18%, it was only a couple of years ago it was charged at up to 40% of gains.

I am not advocating a return to the failed policies of the 70s. Indeed to me the evidence that higher rates of tax result in a lower total tax take is incontrovertible. Sadly though, I cart see politicians of any persuasion heeding my advice, so tax rises are inevitable. The first have already been announced.

If you agree you will recognize it has never been more important to use this year’s ISA and pension (SIPP) allowances. You only have until 5 April to secure them, so please act now to ensure you don’t miss out.