University is a wonderful place, even if you are reading for an accounting degree. One of the aspects of my taxation course that I remember most vividly was being asked to design a tax system from scratch, with no preconceptions and no existing tax legislation. What a wonderfully liberating exercise that was, and how straightforward were the systems that our young minds devised. And then we were let loose on the real UK tax system, and life was never the same again.
My previous post summarised a symposium organised by the Institute of Chartered Accountants in England and Wales, on the subject “Is Tax Simplification Possible?”. The general conclusion, even from a discussion which featured a major contribution from the director of the Office of Tax Simplification, was “no”.
However, the co-organisers of the 2020 Tax Commission, The TaxPayers’ Alliance and the Institute of Directors, would beg to differ. Their report “The Single Income Tax” proposes a dramatic and far-reaching simplification of the UK tax system, and is therefore worthy of some serious consideration.
The basic idea is that the vast majority of UK taxes would be swept away, including the following old favourites:
National insurance (“almost indistinguishable from income tax”)
Capital gains tax (“an additional income tax on dividends”)
Corporation tax (“penalises some combination of labour and capital based on the economic efficiency of the company concerned”)
Stamp duty and stamp duty land tax (“transaction taxes have little relation to the ability of individuals to pay”)
Inheritance tax (“hits families again on the same money they have already paid tax on, just because someone has died”)
Instead there would be a single income tax, levied at a single rate. The Commission calculates that, at 2011-12 prices, with a £10,000 personal allowance the rate of this single tax would need to be 30% to make government tax revenues account for 33% of national income (like Australia), allowing for an abolition of air passenger duty (fails my green test then) and a fuel duty cut of 5p per litre (definitely fails my green test).
Setting aside the desirability of basing our tax system on that of a country which won less than a quarter as many Olympic gold medals as us and has not won an Ashes series in this country since 2001 (petty I know, but I enjoyed it), this is a very interesting proposal indeed, if rather bleak for my future business and employment prospects. I quote:
“A large and sustained rise in the number of (tax) advisers is surely a symptom of an over-complicated and worsening tax code as much as of an industry becoming more successful in promoting the benefits it offers. Membership of the Chartered Institute of taxation has grown every year from 10,115 in 1996 to 15,400 in 2011”. I was one of each of those numbers, but will try not to let my instinct for self-preservation in any way influence my thoughts on this proposal, that threatens to steal the very bread from the mouths of my young children.
The report makes a compelling case for a 21st century Nirvana where tax liability is determined purely by ability to pay, regardless of the form in which income is received, and tax avoidance is a thing of the past, although whether Nirvana would feature a significant increase in air and road traffic is a more complex question. It does also recognise that merely saying “let tax be 30%” is actually too simple for a modern tax system, and that there is a requirement for some element of greater complexity.
This would primarily take the form of a tax on income from capital, deducting the entire liability (comprising net distributions to holders of capital) at source. UK companies would pay tax on dividend and interest payments less dividend and interest income, whilst share subscriptions, buybacks and loan principal amounts would also be taxed or eligible for credit, depending on the direction of flow of funds.
There is also recognition (of sorts) of issues relating to national insurance / state benefits and also pensions. The political direction from which this report is coming is made clear by an unintentionally hilarious line about state benefits:
“The government’s state pension proposals will remove all but a relatively tiny link in the benefits system with national insurance (query the definition of ‘relatively tiny’ to cover 30 years’ national insurance contributions as the basis for a full state pension).The remaining contributory benefits can easily be reformed. Some of those losing out will be eligible for non-contributory benefits, while benefits for the others could either be abolished or linked to tax payments instead.”
Here is the clearest possible hint that the authors have lost contact with the real world in pursuing their hazy dream of tax paradise. Let’s take people on contributory benefits and just abolish those benefits, or link them to tax payments, which with a personal allowance of £10,000 are unlikely to feature large in the day to day life experience of the benefit claimant. ‘So let’s just let them starve’ might be a fairer way of putting this, I think.
The report also has an intriguing insight into the possible mechanism for abolishing employers’ national insurance, prefaced by the remark that “a key issue is to inform employed taxpayers that they already pay employer’s national insurance”. Well, no they don’t actually. That remark is predicated on the basis that employers fix salary levels on the basis of 112.8% of their employees’ salaries, which is not in my experience how the process works at all.
What the proposal is actually intended to achieve is to mislead employees into believing that their tax liability is being increased, before making them feel good by misleading them into believing that they have enjoyed a corresponding reduction. This becomes clear from the following description:
“An initial step would compel employers to state employer’s national insurance on payslips, add a line called ‘total salary’ that included employer’s national insurance, and rename it ‘income tax (payroll charge).”
An interesting way of reducing complexity by baffling the hell out of the majority of employees; if a proposal requires that to work then it seems to me to be fundamentally flawed.
Protection of pensioners would require further complexity, either allowing them to effectively opt out of the new regime or artificially inflating annuity rates. I am reminded of the comment directed at my grandfather on Rawtenstall market following the introduction of decimalisation:
“I don’t know why they didn’t wait until all of us old ones had died”.
Indeed, given my close association with Wigan, I should also quote the other classic remark directed at my grandfather on that occasion:
“Don’t bother me with that rubbish; I’m moving to Wigan next week”.
So as ever in tax, simplicity implies its own form of complexity. But the real flaw in this plan, the massive elephant not so much lurking in the room as stomping all over the furniture, is VAT. How can a proposal to radically simplify the UK tax system just ignore a massive revenue-raising tax such as VAT? Well of course it has to, because VAT does not fit into the simple world view that it is necessary to adopt in order to imagine that the single income tax system has a snowball in hell’s chance of working in practice.
There are two fundamental problems with VAT in this respect. The first is that it is a tax, not on ability to pay (the cornerstone of the proposed brave new world) but on consumption. Anathema to the authors of the report, because the need (or indeed the desire) to consume resources is not necessarily linked to ability to pay for them. But then any report authors who can airily suggest that contributory benefits ‘could be abolished’ are not going to worry about a little detail like that.
The truth is that VAT is potentially a massively regressive tax, whose worst features in that respect are ameliorated in the UK only by extensive zero-rating of essential items such as food, water, sewerage, new residential buildings, children’s clothing and footwear, dispensing of drugs, public transport and certain specific reliefs for people with disabilities and charities, and by the use of the 5% reduced rate for other items, such as domestic power, to which the EU no longer allows us to apply zero-rating.
Oops, and there goes the other massive complication to the happy world of the single income tax, namely the EU. VAT is a tax largely regulated by the EU, subject to the collective decisions of the members on its main principles and levied at a rate set within fairly narrow bands by the European Commission. So how exactly are we going to deal with VAT in the brave new world? Are we going to abandon our cherished zero-rating schedule and start adding 20% to the prices of food, water and children’s clothes in the name of simplicity? Or are we going to declare UDI and abolish VAT altogether; surely not even the IoD are advocating such a ‘scorched earth policy’ with regard to the EU? Well, apparently, it isn’t important enough to mention. So much for the simplicity of the proposed new tax system.
And then of course we have those taxpayer behaviours that governments see fit to encourage, with resulting complexity in the tax system. Charitable donations, anyone? Investment in riskier unquoted companies? Investment in green technologies in transport or construction projects? All presumably to go by the board, although silence reigns on these issues too.
The reality is that the brave new world would be a nightmare, just like Aldous Huxley’s original version. Let’s face it, the ICAEW symposium had it right, tax will never be simple, just (hopefully) simpler. And anyone who tries to tell you otherwise could be either a fool or a charlatan, or just possibly both.