Students Staff

29 February 2008

Taxing time for Chancellor

Colchester Campus

Tax rises should play a major part in the forthcoming Budget says Professor Abhinay Muthoo of the Department of Economics at the University of Essex.

It may be an unpopular thing to say but Professor Muthoo argues that the time has come to tighten belts: 'Given the current state of the economy and the public finances, the budget should, overall, introduce substantial tax rises and a freeze, perhaps even cuts, in public expenditure in some areas and/or in some public investments.'

The Budget on Wednesday, 12 March, will be the first for Chancellor of the Exchequer Alistair Darling and he faces a difficult set of circumstances, says Professor Muthoo.

'There has been an increased level of volatility in financial markets, which, in particular, has created tighter credit conditions. Global food and energy prices have increased quite a bit and this implies a downward risk to growth in demand and output,' he explained.

'In addition public sector net borrowing and public sector debt remain a problem and public investments, such as nationalising Northern Rock, continue to put pressure on public finances.'

Professor Muthoo also recommends introducing a higher, third rate of income tax for people earning more than £100,000 a year. 'A rough calculation indicates that this would bring an additional income tax revenue of around £7 billion. Obviously this would affect the really rich, top one per cent of tax-payers, but their incomes have been increasing at a fairly high rate over the past several years and it's time to deal with that.'

However he would like to see positive changes to earnings at the lower end of the pay scale: 'The threshold of the 40 per cent rate should be increased. A large number of ordinary people are in this bracket, along with the really rich. But the money isn't there to do this at this time, but, at the very least, the Chancellor needs to put it on the agenda.'

Professor Muthoo believes that proper taxation of 'non-doms', wealthy people who live in the UK but do not pay tax on earnings made outside the country, would not mean a rush of tycoons leaving the country: 'Non-doms are not going to move elsewhere – the benefits of living in London are enormous.'

 He also argues for an increase on taxation on air travel to raise revenue and to help with carbon reduction and calls for a freeze on public sector pay. 'Some public sector employees, such as doctors and headteachers, have received significant increases in pay over the past several years. Some employees should have their pay frozen for the next 12 months and then increases only in line with inflation.'

For further information please contact the University of Essex Communications Office on 01206 874377 or e-mail

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