“You turn if you want to; the lady’s not for turning”
The famous words of Prime Minister Margaret Thatcher in the early 1980s when under pressure to change her Government’s controversial economic policies make interesting reading in the light of the recent proclivities of governments of various political hues to reverse controversial tax changes at the first whiff of a public outcry. So why have such about-faces become common in recent years, and what do they tell us about the modern process of legislating for tax and structuring the tax system?
It makes sense firstly to list the highest profile examples of tax U-turns from the past decade:
1. Gordon Brown’s short-lived zero rate of corporation tax, introduced with a great fanfare as a tax saving measure for small business and abolished a few years later as a tax loophole.
2. Alastair Darling’s abolition of the 10p income tax rate, belatedly realised to result in an increase in taxation for the less well-off.
3. Alastair Darling’s introduction of capital gains tax entrepreneur’s relief in response to the furore over the abolition of business assets taper relief.
4. George Osborne’s three recent voltes-face on charitable giving, hot takeaway food and static caravans.
On a superficial level, these could all be seen as evidence for my embryonic theory that tax is too important to be left to politicians to deal with. Joking apart, the application of political dogma in the complex area of taxation can sometimes create problems, but it is notable in how many cases problems have arisen as a result of governments doing things that might be seen as counter to their prevailing world view (I think 2 and the first element of 4 certainly come into this category), so that would be an overly simplistic way of looking at things.
There does certainly seem to be a difficulty for both politicians and Treasury civil servants in assessing accurately the full consequences of specific tax changes. The tax planning fraternity are quite an inventive group (even discounting those who peddle artificial tax-avoidance schemes), and thus a degree of ingenuity is required in assessing how the economy will respond to an apparently straightforward tax change. Of course no-one has a crystal ball, but I am not sure enough attention is paid to ‘lateral thinking’ in setting tax policy.
I have bemoaned previously on this blog the rise of the professional politician, but I do think there is something missing from the life experience of a senior politician who has not been at the sharp end of the tax system, particularly in running a business or advising others who do so, which may result in a certain naivete about how business will respond to particular tax changes in the real world.
However, in my view the real problem is crystal clear. The modern Parliamentary timetable is so crowded, and also to some extent quite rightly governed by concern for MPs’ family life, that woefully insufficient time is given to line-by-line scrutiny of legislation in general, and tax legislation in particular.
Time was when the committee stage of the Finance Bill would actually involve detailed study of the terms of the proposed changes to the tax system, but that just does not happen any more in practice. As a result, ill-considered legislation finds its way onto the statute book, and it is left to bodies such as the Chartered Institute of Taxation to apply (extra-Parliamentary) scrutiny to tax minutiae, or to lobbyists to make their point on behalf of those they represent about Budget proposals.
Another major reason for ineffective Parliamentary scrutiny is the sheer volume of recent Finance Bills, which have grown exponentially in size over the past couple of decades. Sadly more does not necessarily mean better, and despite attempts to draft tax legislation in a more user-friendly form, much legislation is still verbose, impenetrable, and obsessed with ruling out any possible misinterpretation and blocking any potential avoidance activity. I sincerely hope that the anticipated General Anti-Abuse Rule will to some extent rectify this failing, but that remains to be seen.
Perhaps the most fundamental problem with our tax system is its piecemeal nature, and the fact that it benefits from no fundamental underlying principle. It rather resembles a ‘jerry-built’ property, not constructed on solid foundations and assembled over a large number of years in an illogical fashion. It cries out for someone to undertake a fundamental review and simplification, but much the same problems that bedevil the scrutiny of Finance Bills would also militate against this process.
None of this of course does anyone any good. Politicians are left looking indecisive and fallible when they are forced into a tax U-turn, and taxpayers and their advisers spend large amounts of time trying to deal with a complex tax system which undergoes significant change on a regular basis. There must be a better way of dealing with tax legislation, but as yet it has not come to light.