Why Australia’s Treasurer isn’t sure whether Corporation Tax will still exist in 20 years time
Oct 2014 14

Will Company Tax still exist in 20 or 30 years’ time? Good question. I don’t know. But I’d like to find out the answer.

Australia’s Treasurer, Joe Hockey, answered my question with refreshing honesty at a lecture hosted by the Institute of Economic Affairs about the future of corporate incomes taxes (“Corporation Tax” in the UK).
Joe Hockey IEA twitter pic

I pointed out the relentless downward pressure on average corporate tax rates in the OECD and how some small countries like Estonia have abolished corporate income taxes, instead taxing distributions of funds rather than profits. Much like our corporate tax proposals outlined in by our 2020 Tax Commission‘s Single Income Tax.

I asked if Australia might be the first big economy to bow to the inevitable and follow suit. After joking that he would indeed announce that he was abolishing the tax at the lecture, he discussed the challenges with relation to corporate and cross border consumption tax issues, including the OECD’s Base Erosion and Profit Shifting initiative.

At some point, the downward pressure on Corporation Tax rates will become too great for a big economy to resist abolishing it entirely. The substantial simplification and transparency benefits, along with the considerable wider economic benefit from effectively removing taxation from investment will become too big relative to the revenue additional revenue it raises in comparison to a tax on distributed earnings.

It’s a pity our politicians are so timid that they would prefer to wait until they have no choice rather than seize the competitive advantage available from being the first country to do it.

Why hiking Capital Gains Tax is a bad idea
Oct 2014 08

The Liberal Democrats have proposed an increase in Capital Gains Tax (CGT), currently charged at 28 per cent for higher and additional rate taxpayers. They claim increasing the rate to 35 per cent will raise and extra £500m to fund an increase in the personal allowance in 2015-16.

There are a number of major problems:

It won’t increase receipts:

  • George Osborne increased CGT for higher and additional rate taxpayers from 18 to 28 per cent in his 2010 Budget
  • So given the performance of the stock and property markets (especially London), you’d expect CGT receipts to be soaring. However:
  • With the 18 per cent rate of CGT revenues were £7.8bn in 2008-09
  • But with the new 28 per cent rate in place, CGT receipts have slumped to £4.3bn in 2011-12 and £3.9bn in 2012-13.

The OBR’s forecasts for CGT have been extremely optimistic:

  • Receipts for 2013-14 are expected to be the same as in 2012-13 – £3.9bn. But:
  • In the 2012 Budget receipts for 2013-14 were projected to be £4.9bn: a 20.4 per cent shortfall
  • In the 2013 Budget receipts for 2013-14 were projected to be £5.1bn:  a 23.5 per cent shortfall

Logic suggests the Government’s own calculations would suggest a 25 per rate, not 28 per cent

To increase revenues, rates should be cut

  • Look what’s happened in the United States.
  • The graph below shows Capital Gains Tax rates and revenues in the United States at constant prices. Clearly the rate cuts starting in the early 1990s have boosted revenues.


CGT severely distorts incentives and gums up markets. Rate hikes will make this even worse:

Consider this example:

  • Danny Davey is considering selling his second home. He bought it a few years ago for £500,000 and now it’s worth £750,000. He thinks now would be the right time to sell as he’ll probably be changing jobs soon and moving out of London. Danny realises there will be 28 per cent charge on most of the £250,000 his shrewd investment has made. But he’s not short of cash and knows that the tax rate has gone up and down in the past so might well come down again in the future, especially a new government that has seen the chart above. He decides not to sell.
  • The Treasury gets nothing. There’s one fewer transaction in the market. Potential buyers would need to buy another property instead and possibly not buy at all, out of fear of being “locked in”.
  • The same logic can be applied to shares and business. CGT has the effect of “locking-in” ownership of assets leading to their misallocation.

It’s a double tax:

  • A company increases its profits and pays more Corporation Tax as a result. This increases the value of shares. This increase is a capital gain which is taxable if the shares are sold.
  • To their credit, the government’s reforms to ISAs have offset some of this for those with modest savings as CGT is not levied on shares held in ISAs.

It’s a tax on inflation:

  • If someone buys some shares for £100 and sells them a few years later for £200, some of this gain is very likely to be inflation. CGT makes no allowances for this, reducing returns and maybe even turning gains into losses.

Lots of other countries don’t have CGT at all:

  • Belgium, Czech Republic, Turkey, Switzerland, South Korea, New Zealand, and the Netherlands to name just a few have no Capital Gains Tax in the same form as the UK’s. High rates put the UK at a disadvantage to these countries in a globalised economy where capital is much more mobile than it once was.
  • All in all, this is an extremely poorly-thought through proposal. The Liberal Democrats have failed to learn lessons from the last few years and are proposing measures that will reduce growth.
  • CGT is an economically destructive tax which leads to the misallocation of assets and discourages entrepreneurship. It should be abolished as recommended by the 2020 Tax Commission.
“Tax Now, Die Later” – A Letter to the Editor
Aug 2014 12

In response to yesterday’s Daily Telegraph story, “Savers could pay death tax while they are still living,”, our Chief Executive was published in Letters to the Editor today.

Instead of adding further complexity and giving HMRC more powers, the Government should simplify the tax code and eliminate the loopholes that have dented public confidence in the system.

Read his letter in full here.

Scrap ‘sneaky’ National Insurance, says PwC Citizens’ Jury
Aug 2014 05

PwC senior economist and former Bank of England Monetary Policy Committee member Andrew Sentance has called for political parties to embrace a ‘serious tax overhaul’ in an article for the Telegraph. The ‘Citizens’ Jury’ convened by the consulting group recommended substantial tax reform which echoes much of the findings of our own 2020 Tax Commission’s Single Income Tax.

The group’s report, ‘Taxation in the UK: a citzens’ view‘, recommended ending the slab rate structure of Stamp Duty, abolishing Inheritance Tax and abolishing National Insurance, replacing it with a single tax on income. It reported on the views of a panel of 22 members of the public selected to broadly represent national demographics. Perhaps unsurprisingly, they found that National Insurance was ‘sneaky’, that the system ‘should just be upfront’ and that it ‘should all be rolled into one’. They also objected to a Mansion Tax.

Not all the recommendations were advisable. Calls to change the rules on VAT to include non-essential foodstuffs such as caviar, for example, would lead to a field-day for lawyers with an inevitable slew of new legal questions along the lines of whether Jaffa Cakes are ‘cakes’ and so excepted from VAT or ‘biscuits’ and therefore subject on account of being chocolate covered. The argument against expanding VAT was best made by Telegraph deputy editor (and chairman of the 2020 Tax Commission) Allister Heath in his recent column.

Perhaps most interestingly of all, the group backed the principle of a single rate of Income Tax but nonetheless shied away from recommending it. They thought that a single Income Tax rate ‘felt fair’ and had benefits in terms of simplicity, clarity and transparency. But they did not want to implement such a system now because they rightly opposed increasing benefits to ensure nobody would be worse off:

I think if we were one of those states after the breakup of the Soviet Union, this would be the one to go for. But you just can’t do it here and now, can you?

Here’s the thing: yes, you can. But it requires a serious rethinking of what the Government is for and what it needs to do. As our 2020 Tax Commission found, you can implement a Single Income Tax at a rate of 30 per cent, which would provide a cut for all taxpayers. That would raise 33 per cent of national income for the Treasury, compared to the 37 per cent the current system raises. In other words we’d need a Government like Switzerland or Australia’s rather than Spain or New Zealand’s.

Not only would such a system be much clearer, simpler and fairer, it would also provide significant economic benefits by sharpening incentives to work, save and invest in Britain. Dr Sentance is right, politicians should take note.

Can the road to Kansas deliver economic results?
Jul 2014 25

The Daily Telegraph’s Jeremy Warner says that Britain should follow Kansas and dramatically reduce taxes, citing the economic benefits that the state is starting to enjoy. Mr Warner highlights evidence that:

both private-sector growth and job creation have improved sharply relative to national averages. Rates of private-sector job growth are virtually back up to the national average, having significantly lagged behind them in the past. Kansas is also experiencing record levels of company registrations. Many of these will eventually lead to start-ups and extra jobs.

Experience, in other words, is already beginning to mirror what other low-tax states achieve. If we take the 15-year period between 1998 and 2013, the 50-state average for private-sector job creation was 8 per cent. Yet for those states such as Texas, Florida and Nevada that don’t impose income taxes at all, the rate of growth was 18.3 per cent, against 5.6 per cent for those that do. Tax competition, it seems, works in practice just as you might expect it to in theory.

Although the coalition has implemented some welcome tax cuts (especially Corporation Tax and raising the personal allowance), there have also been deep failures. A serious cost of living crisis and many other problems show that the current fiscal plan of increasing the tax burden and reducing spending is not enough. Mr Warner rightly asserts that reducing taxes can allow more manoeuvre for wealth creation in the economy, sharpening incentives and encouraging more investment, growth and employment.

News today that the economy is at its biggest ever level is welcome, but it isn’t quite cause to cheer the Chancellor that it might at first seem. The GDP figure misleads as when expressed per head it is still lower, signalling that we are all still considerably less well off than we were before the recession as Jeremy mentions “GDP per head has still got some way to go before it attains past levels.

On top of this, the Government also “managed to borrow more so far this year than last.” This means that despite the healthy GDP figures, the Government is still struggling to pay its way and future taxpayers will be left to foot the bill.

So George Osborne should not feel too satisfied with the latest figures, especially falling real terms incomes mean that whilst the economy may officially be better, the people are poorer and the government are trying to squeeze more money out of the public.

The idea that tax cuts are necessary is by no means a new one, of course. Our 2020 Tax Commission highlighted a much simpler system that will benefit the economy where spending and tax are both reduced to 33 per cent of GDP, down from 42.5 per cent for spending and 37.7 per cent for taxes this year. Maybe it is now time to follow the path set by Kansas which displays encouraging signs on private-sector growth and job creation. We need to look at dramatically reducing taxes and getting the government and citizens back on a sound financial footing to ensure prosperity for all.

COMMENT: Forget the celebrity tax allegations: Our complex system is the real issue
Jul 2014 10

I explain in City AM this morning why tax reform should be the lesson from the latest avoidance saga:

Take That’s Gary Barlow has again been reported to have participated in complicated tax avoidance schemes. And as ever, discussion on the subject has been clouded by inaccurate reporting. Many have claimed that personal tax avoidance “costs the economy” £5bn a year. This is confused nonsense, based on an HM Revenue & Customs (HMRC) estimate of how much personal tax avoidance costs it. Extra money in people’s bank accounts has not left the economy – it’s still there, perhaps being spent more widely.

Click here to read the full article

Tax reform urgently needed – a lot of people do know that, Mr Caine
Jul 2014 09

A clutch of celebrities including Michael Caine, the Arctic Monkeys, Katie Melua and George Michael are said to have sheltered money in the Liberty tax avoidance scheme, according to The Times this morning. The paper also named Take That crooner Gary Barlow, BBC presenter Anne Robinson and former Tottenham Hotspur and England midfielder Darren Anderton.

The revelations will no doubt cause particular problems for those among the scheme’s participants who have previously boasted about how they enjoy paying tax. For example, Katie Melua was nominated for ChristianAid’s ‘Tax Superhero Award’ after she said that she was happy to pay tax because she had “seen what it is like living in a country where people don’t pay tax and have poor services in terms of health and education“, claiming she paid “nearly half of what comes to me in taxes“.

But beyond the public relations troubles for the stars, the news only reinforces how powerful the case for serious, fundamental tax reform has become.

Last night, reacting to the reports, our Chief Executive Jonathan Isaby said:

Ordinary taxpayers are understandably angry at those seemingly not paying their fair share, be they celebrities or anyone else. But it’ll keep happening until politicians act to make the tax system simpler and fairer. The case for serious tax reform is now stronger than ever – lower rates, simpler rules, no exceptions.

Quite. Politicians need to start implementing a much clearer, much simpler and much fairer tax system. Our Single Income Tax plan shows them how to do it.

COMMENT: We urgently need simpler taxes: National Insurance is a good place to start
Jul 2014 02

I wrote for City AM this morning on the Public Accounts Committee report and merging National Insurance with Income Tax:

JUST days after the House of Commons Public Accounts Committee published a damning report, describing tax authorities as “unable to cope” with the number and complexity of UK tax reliefs, it has emerged that the chancellor is considering abolishing employee’s National Insurance and merging it into income tax. This is genuinely great news. With a tax system that takes Tolley’s tax guides over 17,000 pages to explain, scrapping an unnecessary charge like National Insurance would yield significant simplification benefits.

Click here to read the full article

TPA welcomes plans to merge Income Tax and National Insurance
Jun 2014 30

Chancellor George Osborne will unveil plans to merge National Insurance with Income Tax in the manifesto for the general election. He also came “within a whisker” of implementing the reform in Budget 2014, according to reports in the Times and the Independent. This is great news and comes not a moment too soon.

It’s good news that the plans reportedly involve protection to stop pensioners from having their incomes drawn into the new merged tax, a feature that our campaigns have always recommended. Less encouragingly, employer’s National Insurance does not appear to be included in the plans. This is a shame because so-called employer’s contributions are the most pernicious, deceptive and dishonest section of National Insurance. They may be called “employer’s” but economists are as good as united in believing that they fall on employees in just the same way as Income Tax and employee’s National Insurance.

Nonetheless, we’re delighted that one of our long-standing core campaigns is getting some political attention. The TaxPayers’ Alliance has long campaigned for this reform:

  • Abolish National Insurance was published in 2011, which set out the case for merging it into Income Tax and explained how it could be done.
  • The Single Income Tax was published in May 2012, which set out a comprehensive reform of the UK tax system through a Single Income Tax and a key component of this was abolishing National Insurance.
  • How to abolish National Insurance was published in November 2012, which mapped out in more detail how it could be abolished as part of a move towards a Single Income Tax. The paper set out the detail of how to bring in the reform which ensuring groups such as pensioners were protected from paying any more tax.
  • The Giant Payslip was launched in March 2013, illustrating how the merging National Insurance could simplify people’s payslips by making the deductions more transparent.
  • What are you really paying? video was launched in May 2013, to illustrate the fact that National Insurance is really just another form of Income Tax.

Worries about the ease of merging the IT software for the two tax systems caused the Chancellor to hold off. Nobody wants another government IT catastrophe, but Mr Osborne should grab this bull by its horns and press ahead with the plan.

PAC right to slam complexity but comprehensive tax reform is the only solution
Jun 2014 26

The Commons Public Accounts Committee chaired by Margaret Hodge MP has published a report drawing attention to the use of reliefs in the tax system as a tool of government policy. The report slammed the tax authorities as:

unable to cope with the demands of an increasingly complex tax system, including tax reliefs. Tax revenues as a proportion of GDP remain stable over time but the tax code becomes more complex year on year. In March 2011, the Office of Tax Simplification reviewed 155 reliefs, and recommended that 47 should be abolished. While this led to the removal of 43 of these reliefs, a further 134 new reliefs have been introduced since 2011. Each new relief complicates the tax system, and increases the length and complexity of British tax law.

It is unclear whether the impact of particular tax reliefs on tax revenue streams is properly considered, for instance the impact of agricultural property and business property reliefs on overall inheritance tax revenue. To accommodate new legislation, and anticipate the actions of avoiders, Finance Bills are four- to five-times longer than 50 years ago.

The committee is right to criticise the maddening complexity that comes from having a tax system with so many reliefs, exemptions and loopholes. The needlessly complicated labyrinth of rules and regulations leads to avoidance that in turn corrodes public trust in the system. But this problem can only be solved by comprehensive tax reform that delivers substantially simpler, clearer and fairer taxes. The case for reform has become overwhelming.

Scrap Corporation Tax and Capital Gains Tax on small firms, says CPS
Jun 2014 18

Centre for Policy Studies (CPS) chairman Maurice Saatchi has called for small businesses to be exempt from Corporation Tax and investments in small businesses to be exempt from Capital Gains Tax. The policy is being launched at their Liberty 2014 conference to mark the group’s 40th anniversary.

The proposals are a superb addition to the tax policy debate and would significantly enhance incentives for people to start new businesses and grow existing ones. The proposals use the existing legal definition of a small business and end the special treatment of dividends for Income Tax for eligible companies. The CPS estimates that the static cost of the policy is £11.5 billion in the first year but it would become revenue-neutral within 4 years due to dynamic effects of increased investment, jobs and output.

The CPS policy bears significant resemblance to the small business trial I proposed in our How to fix corporate taxes paper published last year. That policy would have introduced a ‘lite’ version of the Single Income Tax on net distributed funds for small companies. It’s great that the CPS have explained in some detail how their version of the idea could work, practically.

Unfortunately, the policy has three key disadvantages compared to both the status quo and the Single Income Tax transitional proposals.

First, by retaining the existing high rates of Income Tax while simultaneously leaving retained earnings untaxed, certain avoidance opportunities could be more prone to abuse.

Secondly, the policy requires that businesses remain small if they want to retain the tax treatment involved, thereby creating a disincentive to grow beyond the threshold otherwise known as a ‘cliff edge’. It might have been wiser to allow companies to retain the treatment indefinitely, perhaps requiring merged companies to reapply to prevent larger companies ‘reversing’ into smaller ones to take advantage of the policy.

Finally, it lacks the more fundamental neutrality benefits of taxing net distributions and so does not fix problems like the debt bias or the incumbancy advantage. But this policy is intended as an immediately implementable policy that would apply to the 90 per cent of businesses which are small, representing 50 per cent of employment. And while it is not as ambitious as the Single Income Tax, it is nonetheless both bold and worthwhile.

Overall, the CPS’s proposal would represent a substantial, welcome and meaningful first step in a move towards a better tax system. Politicians should take note.

Nigel Farage, Ukip’s emerging tax policies and a Negative Income Tax
Jun 2014 02

Nigel Farage confirmed yesterday that Ukip are not likely to repeat their 2010 General Election manifesto pledge to abolish employee’s National Insurance and introduce a flat rate of Income Tax. The policy was to merge employee’s National Insurance (then charged at two rates of 11 and 1 per cent) with Income Tax (then three rates of 20, 40 and 50 per cent) into one rate of tax of 31 per cent.

Asked on the Andrew Marr Show if a flat rate of tax was still a Ukip policy, he said:

No, we’re going to rethink the tax policy. I think that was badly explained because people thought gosh, we’re going to put tax up for the low paid. Well, no. The idea was to abolish National Insurance. What I can tell you for certain is that our biggest tax objective in that next manifesto will be: no tax on the minimum wage. we’ve got to incentivise people to get off benefit and to get back to work. Now that obviously will cost money…

I think a top rate of tax of around about 40 per cent is the one that will bring in the most revenue into the Exchequer and i think through the 80s and 90s we saw that… anything over 40 and you start seeing people going overseas. But really what we’ve got to worry about actually are the millions of people there on low pay and, frankly, without sufficient incentives to be in work.

It’s a shame that Ukip seems to be watering down their bold policy of tax simplification. But it hasn’t been completely abandoned. Only the aspect of having a single rate was explicitly ruled out and Farage also spoke of raising the personal allowance up to around £12,500 (approximately the amount earned by someone working the average 37.5 hours per week on £6.31 per hour for 52 weeks). He hinted that they will propose abolishing the 45p rate of Income Tax and his language about merging National Insurance suggests that there has not been a change of heart on policy terms there, either. It’s possible that rather than being dropped, the party might wish to present a merger of National Insurance as a separate, distinct policy.

There are three things politicians from Ukip and other parties might like to remember, however:

1. There is evidence to suggest that over a longer time period the revenue maximising rate of income tax is even lower than 40 per cent. Although this might have been the level 20 or 30 years ago, labour is more mobile now and higher labour mobility means lower revenue-maximising tax rates and while a tax rise might bring in revenue now, it often takes years before people fully adjust their behaviour to new rates of tax.

2. The 2020 Tax Commission’s Single Income Tax is a plan for major simplification that extends beyond Income Tax and National Insurance to Corporation Tax, Capital Gains Tax, Inheritance Tax and Stamp Duty, too. I explained the policy in more detail for Taxation magazine and I set out in practical steps how to reform tax in two papers: How to fix corporate taxes and How to abolish National Insurance.

3. Farage is right that we need to transform incentives for the low paid. By raising the personal allowance to £10,000 the Government has already gone some way towards this and the Universal Credit’s 70 per cent taper could make a meaningful contribution to simplification and improving incentives. But it’s not enough. Our 2010 paper Welfare reform in tough fiscal times sets out how a Negative Income Tax could substantially simplify welfare while letting the low paid keep more of what they earn.

The economy is recovering, employment is at record levels and even productivity seems to have stopped falling. But while the public finances are getting less awful, the Government will still rack up additional borrowing of almost £100 billion this year. All while millions of people are trapped on welfare. We need comprehensive tax reform to sharpen incentives to invest and work in the UK and the Single Income Tax is the best plan there is. And we need a more affordable welfare system that encourages people into work and into better paid work. And a ‘Negative Income Tax’ along the lines set in our Welfare reform in tough fiscal times paper is the best guide for how to do that.

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