This guest post is by TaxHelp for Older People, a national charity offering free tax advice to older people on incomes below £17,000 a year. The Helpline number is 0845 601 3321.
The short answer is so that we could defeat Napoleon Bonaparte. The flow of revenue to the Exchequer was sorely strained by the Napoleonic wars, and the usual forms of taxation were inadequate. These were based on status, property, goods or products rather than income. There were taxes on gloves, bricks, candles, windows, bachelors, soap, hair powder and hats. Gloveless bachelors under 25 who didn’t wash or powder their hair therefore made little contribution to the Treasury.
Of course some of these taxes created their own avoidance procedures, such as property owners blocking up windows to cut their bills. The fashion for wigs died out in the face of the annual one guinea tax. Other taxes, such as dog licenses, were ditched because they cost more to collect than they raised.
Like all temporary taxes, income tax waxed and waned until it became part of our everyday life in 1944 when the modern PAYE (Pay As You Earn) system commenced. Even then it was only paid by about a quarter of the population, the rest being below the threshold at which tax started to be paid. Nowadays anyone working 30 hours a week on national minimum wage will pay some tax.
Income tax has the advantage that it can be manipulated to ensure that the richest pay most tax, both through the fact that those with more money will pay more anyway if you have a flat rate of tax, and by increasing the rate as they get richer than the Government thinks fair. Thus the Chancellor can impose a higher rate of tax over certain thresholds. Against this there are a range of reliefs and allowances designed (in theory) to make life simpler. This generates more employment in the form of accountants and tax advisers to cope with the complications. Which is why TaxHelp for Older People is there to help.