Regular readers will now that I am in favour of a radical overhaul of the tax system, so I am always interested in the views of others of like mind, even where we differ greatly on the desired detail of the changes. So I was interested to see that the 2020 Tax Commission had put forward its ideas for re-shaping the tax system. 

The Commission involves the Taxpayers’ Alliance and the Institute of Directors, and is therefore coming from what one might refer to as ‘right field’, which seems to explain some of the detailed proposals. The main headline suggestions, together with my comments, are as follows:

1. Reduce taxes to 33% of national income, compared to 38% at present

These would be challenging economic times to attempt something this radical, which would imply, as the report confirms, that “a continuation of current austerity measures until 2020” would be necessary, as this would extract a great deal of money from the government’s pocket at a time when it is struggling to generate tax revenues in any case.

Given where the report is coming from, the theme of “leave us alone to get on with it and we will generate growth” is to be expected, but does require us to exhibit a faith in unbridled capitalism and its potential which has not necessarily been justified by past events. Perhaps, to be fair, the Commission would argue that we have never had unbridled capitalism, but our nearest approach in the mid to late 1980s did lead to the recession of the early 1990s and very high interest rates, I seem to recall.

2. Cap marginal income tax rates at 30% and increase the personal allowance to £10,000

To deal with the easier of these first, the personal allowance is well on its way to £10,000 anyway, and I do not doubt that the commitment to reach this level before the next election will be met. This is a great simplification of the tax system and help to the poorer sections of society, provided of course that they have taxable income, and is to my mind a laudable objective.

I find it hard to be so positive about the concept of a top marginal income tax rate of 30%, regardless of how astronomic the level of income might be. In simplistic terms, this is hardly the section of society that most needs financial help, but the argument would presumably be that if the rich are left in possession of much more of their income they will invest it, thus helping to generate growth.

My father, who was hardly a creature of the political left, used to say about tax reductions for top rate taxpayers “they’ll just buy a bigger boat”, which was shorthand for saying that a lot of the money will be spent on imports, which would do little to nothing for the UK economy. I am more inclined to tie tax cuts for the rich to clear incentives  to invest in the UK economy, the Seed Enterprise Investment Scheme being an excellent example of this. Otherwise we run far too much risk of taxpayers not doing what is best for the economy with their fiscal windfalls.

3. Taxes on capital and labour income ‘disguised’ as business taxes should be abolished and replaced with a tax on distributed income

I take the first part of this to refer to corporation tax on retained profits and to Class 1 national insurance. Certainly employers’ national insurance is a rather strange thing, being effectively a tax on job creation, which sits a little oddly at a time of high unemployment.

There is indeed little doubt, as I have said before, that national insurance is now effectively a tax, and like Class 4 national insurance for the self-employed, employers’ class 1 national insurance is a particularly clear example of this, having no association whatever to the provision of state benefits. However, it does raise a lot of revenue for the government. Even so, there is little economic justification for it, and it does hinder efforts to increase employment, so I do have greater sympathy for this suggestion.

Tax on retained profits is also an interesting phenomenom. I imagine that what the 2020 Commission is getting at here is the counter-productive nature of taxing profits retained by businesses to finance expansion, and I have some superficial sympathy with that view. However, I think there are two powerful objections to this proposal.

Firstly, it runs the risk of being yet another discriminatory factor in favour of trading through a company in a tax system which already bristles with incentives to incorporate. I say this on the basis that whilst it is easy to conceptualise a tax that discriminates in favour of retained corporate profits (a stark contrast to the bad old days of apportionments to encourage profit distribution) it is much more difficult to see how that discrimination might be applied to partnership and sole trade profits. I will come back to a possible logical extension of this in a moment.

Secondly, it fails to deal with the purpose for which corporate profits are being retained. If they are being retained to finance expansion, and in particular to generate additional employment, then clearly that is a good thing. However, the current tax regime often encourages company owners to retain profits not for this purpose but simply to avoid high rates of personal tax on distributed income, and to benefit (provided they do not overdo the cash retention too much) in the form of a 10% capital gains tax rate on eventual dissolution of the company.

With respect (which is usually my code for “your arguments are rubbish”) such a change to corporation tax, coupled with an increase in tax on distributed income, would make this tendency much worse. I repeat, retained business profits are only a good thing if they are used for something worthwhile in macro economic terms.

Which brings me back to the issue of discrimination in the tax system between the corporate and unincorporated structure, the detail of which I will make the subject of a separate post. Given that governments appear to be incapable of understanding that the majority of UK business remain unincorporated, and insist time and again upon concentrating tax incentives on the corporate sector, has the time come to make it compulsory for UK business to trade using a corporate structure?

Now there is an idea more radical than anything that the Commission puts forward, but actually one that makes a certain amount of sense. Again I will deal with the detail of this in a separate post on the subject, but this would mean that when the government offered a tax incentive through the corporation tax regime it did offer it to the whole business community. I also (without going into detail here) see it has having advantages for tax compliance and potentially also in terms of cleaning up the employed / self-employed categorisation minefield.

4. Abolition of transaction and wealth taxes

No right wing wish list would be complete without these old favourites, so sure enough here they are. I ask myself how much more than £650,000 should a couple be able to leave to the next generation (however feckless or undeserving they might, or might not, be) without the exchequer taking an interest in proceedings.

I would have thought that the agenda of the IoD in particular would have been in favour of wealth generation, not wealth inheritance. If one is going to run an argument that business people can be trusted to do something much more worthwhile with their money than governments can, legislating to allow them to leave unlimited sums free of tax to the next generation appears, to put it mildly, counter-productive. To my mind abolition of inheritance tax would send out all the wrong messages; if we are going to be a meritocracy, all well and good, but surely on the basis of our own merits, not those of our ancestors?

Some of the same issues apply with SDLT also. Surely SDLT is the ultimate tax on consumption (taxes which in other contexts the Commission seems to like), and I am not sure what economic merit the acquisition of a fabulously expensive house has, other than tying up assets that could otherwise be used to invest in the growth of the UK economy. There is more merit in the idea of a more benign SDLT regime for commercial property, particularly owner-occupied commercial property, but that is not a distinction the Commission chooses to make, which is instructive.

5. Consumption taxes to remain, while transport taxes should be cut or abolished

The first part of the statement is unobjectionable, although one does wonder whether the time is right for a reintroduction of a higher rate of VAT on ‘luxury’ goods, by which I mean extremely expensive items realistically accessible only to the seriously wealthy. After all, would this not be a valuable disincentive to them frittering away their new found tax savings on conspicuous consumption, when they could be investing them for the good of us all?

Meanwhile, on which planet are the 2020 Commision currently residing with regard to the second limb of this suggestion? Presumably not the one that we are in the process of destroying with our carbon emissions. Reckless environmental behaviour needs to be discouraged in as many effective ways as possible, and making people pay heavily for the privilege of polluting the environment is as effective a way as any, and more effective than most. Shall we consider the decline in smoking over the past generation as an instructive example?

One of the real intellectual challenges for early 21st century business is finding a model that allows commerce to thrive without continuing our wanton destruction of the environment. I suggest that the IoD would be better engaged in contributing to that worthwhile project rather than harking back to a vanished transport era that should be not only dead, but damned.

6. Local authority grants to be cut to match the yield of local taxes

Not my specialist subject, but isn’t this an incentive for local authorities to raise council tax dramatically? And given the natural tendency for the haves and have nots in our society to cluster together, does this not put an awful strain on poorer areas whilst greatly easing the burden on wealthier ones? Oh yes, given where this report is coming from, I suppose that is the whole point, isn’t it?

Summary

If one wishes to make an unpopular case, your argument needs to be objective, deal with potential criticism head on, be selective in terms of the clear benefits of what you propose and in general carefully crafted and structured. The special pleading of the 2020 Tax Commission meets none of these criteria, and as a result comes across as a plea for special treatment for the already privileged few.

In this respect this report is one of the most profoundly depressing pieces of reading of 2012 so far, and the Institute of Directors in particular should be ashamed of its part in such an intellectually shoddy piece of work.

I really must learn to say what I think, mustn’t I?

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