Taxation and incentives

• Thatcher was known not to believe that taxation should be used to take money from the rich to subsidise the poor
• She thought that taxing the rich not only led to a lack of incentive to work hard and generate wealth among earners but also bred dependence at the bottom of the social scale
• She hoped that tax cuts for the wealthy would promote more investment, more growth and therefore more government income, allowing her to cut taxes further
• In the 1980 budget, the top rate of income tax was cut from 83% to 60%
• In 1988, the top rate of income tax was cut again to 40%
• The cuts in the early 1980s were subsidised by a huge govt windfall from the discovery and sale of North Sea Oil
• The North Sea Oil had been extracted and sold by a state-owned corporation until Thatcher sold government shares to private investors in 1982
• Chancellor Nigel Lawson was happy to point out that, due to a decline in tax avoidance schemes, the wealthiest 5% of individuals paid as much tax in 1988 as they had done in 1978 when they were taxed at 83%
• The basic rate of income tax was also reduced from 33% to 25%
• Inheritance tax was cut from 75% to 40%
• However, although income tax fell under Thatcher, the average tax bill rose by 6% between 1979 and 1990, the reason for this was the growth of indirect taxation (VAT) and National Insurance payments
• In 1979, VAT was increased from 8% to 15%, this figure at which it remained until 1991
• Both VAT and National Insurance are regressive taxes; they take a higher proportion of income from the poor than the rich
• The shift in the tax burden from direct to indirect taxes has contributed to the growing gap between the richest and poorest in British society since the late 1970s