Writing for City A.M. today, I said that we need comprehensive tax simplification from politicians, not more hot air:
THE Public Accounts Committee offered about as much to the debate on tax avoidance yesterday as a hot air balloon offers transport. No clear direction, not a lot of movement, but a lot of hot air.
Instead of a critical dissection of how the system works, and an examination of what might be done to fix any problems, the committee’s chair Margaret Hodge railed angrily against companies like Google operating under the law as it stands, rather than by using her understanding of “common sense”. That’s no substitute for the serious reform we need if we want a tax code that’s fit for purpose.
Boris Johnson’s London Finance Commission today launched its bid to wrest control of a range of taxes from central government. Tony Travers of the LSE, chair of the commission, said that the whole suite of property taxes should be devolved: full control of Council Tax, Capital Gains Tax on property, Stamp Duty Land Tax on homes and business premises and Business Rates.
This move to a greater degree of local decision-making on tax will lead to some politicians making bad decisions and the commission’s call for entirely new taxes and borrowing powers are a cause for concern, but international evidence shows a strong correlation between decentralised decision-making and efficiency so that overall it should lead to an improvement. The OECD noted in a 2011 report that:
There is a general view that more tax competition leads to more efficiency in the public sector, both by making public providers more responsive to consumers’ tastes and by raising the quality and lowering the cost of publicly-funded services. Tax autonomy provides voters with an additional lever in shaping the public sector, namely to decide on tax levels, making them more aware of public service outcomes.
The fact that devolution on both spending and tax decisions leads to greater efficiency is one of the three most relevant points to be drawn from the extensive review of literature in the 2020 Tax Commission’s The Single Income Tax. The second point is that government spending holds back economic growth and lower government spending leads to faster growth. The third point is that transaction taxes such as Stamp Duty on homes are among the most destructive of taxes and should be abolished. So it was good news that the Mayor of Hackney, Jules Pipe, said at the launch event today that he would be quoting the TPA in future, with reference to local decision-making. Good news too that Mr Johnson acknowledged the problems Stamp Duty causes in London and signalled his intention to see the rates cut. And when Mr Travers said “the TaxPayers’ Alliance might take the view that lower rates would lead higher revenues”, the Mayor responded robustly: “I take that view!”.
As Matthew Sinclair, Chief Executive of the TaxPayers’ Alliance, said:
Boris Johnson’s London Finance Commission is right to say that more tax powers should be transferred from the Chancellor to the Mayor. The current situation where local politicians are responsible for spending money but not for collecting it through taxation encourages irresponsible behaviour.
London faces particular issues with property taxes. Stamp Duty on homes is a fundamentally flawed tax that causes significant problems in London and should be abolished. Handing tax powers down from the Treasury should be seen as an opportunity to cut rates, not an excuse to fleece Londoners for even more cash. The Mayor’s progress in cutting his share of Council Tax shows what can be achieved and international evidence certainly shows that devolution leads to better local government and lower overall taxes.
Reacting to today’s report Tax avoidance: the role of large accountancy firms from the Public Accounts Committee , Matthew Sinclair, Chief Executive of the TaxPayers’ Alliance said:
“Our hideously complex tax code makes it easier for well-paid accountants to run rings around a taxman who is reliant on the external help of the big four. The power to make our tax system simpler and fairer lies squarely in the hands of politicians. They must stop pontificating about individual cases and actually do something to reform the system which they designed and have been tinkering with ever since.
“The committee is right to say that radical action is needed to simplify the tax system. Strategic reforms are needed to get rid of redundant double taxes and end the need for countless complicated reliefs. Then taxpayers could have confidence that everyone was paying their fair share.”
The TaxPayers’ Alliance (TPA) proposed a radical simplification of the tax system in the 2020 Tax Commission, a joint project between the TPA and Institute of Directors (IoD). The final report of the commission, The Single Income Tax, can be found here.
The Daily Telegraph’s Jeremy Warner has written about his ‘epiphany’ moment when he realised that UK banks really are being too risk-averse:
At a Grant Thornton discussion among businessmen in the West Midlands which I was moderating, Jonathan Duck, chief executive of the flooring company Amtico, said that he had become so frustrated in trying to persuade bankers to finance new investment that he’s sold the company.
Despite having £20m of accumulated cash on his balance sheet, the bank wouldn’t provide the money on the scale necessary to fund planned investment in new manufacturing facilities because of conditions attached to the company’s borrowing facilities. So in the end, Mr Duck together with his private equity backers simply sold the company to an American trade buyer, which immediately sanctioned the investment and provided the finance.
Mr Warner rightly identified that overcoming this problem through the banking system will mean either letting banks lend out more money based on the same amount of capital (so-called ‘capital adequacy ratios’) or leaving taxpayers to bear the risk. Neither are attractive choices.
But there is another option: capital taxation reform. As he goes on to say:
Ultimately, the solution to this problem may be to make equity as tax efficient as credit, thereby encouraging companies to bypass the banking system entirely in their search for finance, but don’t hold your breath on that one.
The Single Income Tax shifts the basis of capital taxation from profits to distributed income, providing the solution Mr Warner describes. As well as being fairer and simpler, this shift would eliminate the pro-debt bias in the tax system that means it is cheaper for companies to raise capital through loans and bonds than through issuing shares.
A new book by the Adam Smith Institute’s Research Fellow JP Floru assembles a small mountain of anecdotes, statistics and historical analysis to make a powerful case. Tougher regulation, high government spending and the high taxes that are required to pay for it all destroy growth and leave end up making everyone worse off. Heavens on Earth: How to Create Mass Prosperity looks at eight countries in terms of low taxes, free trade, light regulation and how changes in policy have led to dramatic changes in prosperity.
Two countries stand out from the crowd, Hong Kong and Singapore. While Britain has had a government which has consumed and taxed between 35 and 50 per cent of national income, in those two countries the proportion has been between 10 and 25 per cent. With a much smaller government holding back the economy , the results have been remarkable:
In 1960, Hong Kong’s per capita income was a quarter of Britain’s. In 1997 it was a third higher, even though Britain experienced sizable growth over that period.
And it’s continued to pull away from us since, widening the gap. The story in Singapore is much the same but, without the political turbulence leading up to the handover from Britain to China in 1997, even more remarkable. The graph below, plotting the World Bank’s per person GDP statistics (expressed in purchasing power parity terms) in France, Singapore and Hong Kong against Britain’s is stark.
It’s notable that all the elements of the 2020 Tax Commission’s Single Income Tax proposal have appeared in the countries listed, from reducing consumption taxes to abolishing Capital Gains Tax, from replacing a tax on corporate profits with a tax on distributed earnings to streamlining multiple taxes on labour income into a single tax. In every case where taxes have been cut and simplified, they have led to significant economic results.
Mr Floru’s book entertainingly recounts the case for lower and simpler taxes as part of a broader theme of greater economic freedoms. Politicians should pay attention to the lessons it holds, and then work towards implementing the serious tax reform outlined in the Single Income Tax that our stagnant economy urgently needs. Tomorrow’s budget would be a great place to start.
Eight years after George Osborne called for the Conservative party to “make a bold case for lower and simpler taxes” after seeing Estonia’s single-rate proportionate tax system in action, David Cameron yesterday praised the “obvious attractions” of flatter taxes after seeing Latvia’s system. When asked whether a Conservative government would make the British tax system more like Latvia’s, where Corporation and Capital Gains Tax rates are 15 per cent and income is taxed at a flat rate of 25 per cent, he said:
As for the very attractive sounding Latvian tax system, obviously there are advantages if you are able to redesign your tax system when you achieve your independence and start with a wholly new approach. But the idea of flatter and simpler tax rates and tax systems has its attractions. We have been able to do that in some cases in the UK. For instance, our corporation tax rate is heading down towards 21%, and there was a report by KPMG just this week saying that, in the course of just three years, the UK has gone from having one of the least competitive corporate tax systems to having one of the most competitive corporate tax systems. So, we have made good progress on that front.
Up to a point.
The Coalition has made some positive moves towards simpler and lighter taxes. Cutting the main rate of Corporation Tax is a good example. But these moves have been both timid and largely counteracted by other measures which have increased complexity and the weight of the burden. After adjusting for inflation, the total tax bill has risen from £549 billion in 2009-10 to £594 billion this year. As a percentage of national income, the figures are 36.5 per cent rising to 38 per cent.
Recent TaxPayers’ Alliance research showed that the Coalition has already implemented 254 tax separate rises against just 109 tax cuts. By the end of the Parliament these numbers will have risen to 299 tax rises and 119 cuts. So the truth is that, overall, the Coalition has been busy lightening taxpayers’ wallets rather than the British tax burden.
It’s great that the Prime Minister and the Chancellor see the attraction of simpler, lower taxes when they visit Baltic countries which are enjoying the benefits they provide. But they need to take bolder action when they get back home and start serious reform here, such as with moves towards the 2020 Tax Commission’s Single Income Tax. They’ve had nearly three years to take action and it’s time they got serious about tax reform. Otherwise the economy will carry on spluttering without growth.
We can’t afford to wait any longer to tackle our mess of a tax system. Implementing our plan to abolish National Insurance together with bold cuts on Capital Gains Tax and Corporation Tax would be a great place to start.
Responding to the news that Crown Prosecution Service is to announce a crackdown on tax evasion by the “middle classes”, Matthew Sinclair, Chief Executive of TaxPayers’ Alliance, said:
“It is quite right that people who break the law and don’t pay their fair share should face prosecution. But prosecutions will do nothing to stop individuals and businesses with the means to do so taking advantage of the legal loopholes in our overly complicated tax code. Politicians need to make our taxes simpler, fairer and more competitive if they are serious about curbing tax evasion and avoidance.”
The Single Income Tax as proposed by the TPAs and IOD’s 2020 Tax Commission provides a detailed plan for radical but realistic reforms that could be implemented by the year 2020. A serious simplification of the tax system would mean HMRC could focus on catching those who won’t pay their fair share, rather than administering an overly complex tax code.
Click here to read The Single Income Tax, final report of the 2020 Tax Commission
The 2020 Tax Commission’s final report recommended several measures, including:
•Taxes should be simplified and eight taxes should be scrapped entirely
•There should be a single, low, proportionate income tax
Yesterday’s Telegraph revealed the full extent of the 50p tax folly: the number of people declaring income of £1 million or more in the UK fell by more than 60 per cent in the 2009-10 financial year. Unless it was Gordon Brown’s intention to rid the country of unwanted millionaires, it’s clear the policy has been an unmitigated disaster based on an economic fallacy – that higher rates will guarantee higher revenues.
It also means that someone who may have stayed in the UK and started or invested in a business, creating jobs along the way, could be off doing that somewhere else.
Even the most cursory glance at the abundance of economic literature and real-world examples of the consequences of such a policy change should have set the alarm bells ringing. But the last Government pressed ahead with the flawed plans and the highest earners fled or adjusted their remuneration to avoid this punitive tax.
Brown’s ham-fisted approach to the top rate of Income Tax cost the Treasury around £7bn in lost revenue according to The Telegraph. That’s something taxpayers can ill-afford, as politicians tend to hit easy targets with new taxes if they’re not getting the revenues they want.
In today’s globalised world, it’s easier than ever to move abroad and take your business with you. This is why the UK needs a lower, simpler and more competitive tax system. The reforms set out by the 2020 Tax Commission show that tax reform should be accompanied by tax cuts. It can also be done so that every group in the income distribution is better off.
The Chancellor announced in the last Budget that the Government will look into integrating “the operation of National Insurance” with Income Tax. But fiddling with the operation is not enough and the Government’s repeated delays on both their pensions white paper and National Insurance consultation suggests that something bolder might be on the cards.
Come and listen to our panel discuss how the Government could abolish National Insurance from 6.30pm. Doors will open from 6pm.
Richard Baron is Head of Taxation at the Institute of Directors and will chair the panel. He will be joined by David Ruffley MP, Rory Meakin and David Martin.
David Ruffley is the Member of Parliament for Bury St Edmunds and is a member of the influential Treasury Select Committee.
Rory Meakin is Head of Tax Policy at the TaxPayers’ Alliance and will discuss the new Towards 2020 report How to Abolish National Insurance which will show how it can be done in three simple steps without losers.
David Martin was recently Head of the Tax Department for a large City law firm. David wrote Abolish NICs for the Centre for Policy Studies in November 2010.
The event is by invitation only and places are limited. So if you would like to join us, please email your name and organisation (if applicable) to [email protected]
The overall burden on companies of Britain’s tax system has risen up 2 places in a world ranking compiled by the World Bank and PwC. It’s not often that British taxpayers get something to smile about and our smiles won’t be that wide at this news, either. We’ve climbed up from 18th best to the giddy heights of 16th.
While movement up the table is welcome, the fact that the UK is just a place above Kazakhstan and five places below where it was in 2006 shows that there’s a lot that’s left to be desired. So what’s dragging us down the league tables?
The report cited our system’s devilish complexity as a principal reason for the UK’s poor position in the table.
The problems are well illustrated by the fact that while an average sized business in the UK has to make eight tax payments a year and spend 110 hours on tax compliance, a similar sized company in the United Arab Emirates (UAE) makes half as many payments in a tenth of the time. But it’s not just the UAE. There are 20 other countries which also don’t require businesses to spend so many hours preparing their tax returns.
Rates don’t help, either. Corporation Tax in Ireland stands at just 12.5 per cent compared to 24 per cent in Britain. It’s blindingly obvious why major corporations don’t want to base their operations here.
Tax regimes in oil-rich middle-eastern countries are flattered by the value of the oil captured by governments in those countries. So Britain can’t be directly compared with them. But among the top ten systems are Canada, Singapore and Ireland. There’s no reason why we shouldn’t aim for a better system than Canada’s, for example. Business is crying out for tax simplification – 79 per cent of directors want Income Tax and National Insurance fully merged for example. Our recent Towards 2020 paper How to abolish National Insurance shows the Government how it can merge the system without creating large groups of losers.
The 2020 Tax Commission’s final report The Single Income Tax outlines the complete overhaul of UK taxes that any Government intent on pushing Britain back up the tax tables. Radical reform would boost enterprise, create jobs and restore growth to our flat-lining economy. It’s time the Government got to work. Taxpayers deserve better than 16th best.
Pensioners, the self-employed and other groups would benefit from our proposal to abolish National Insurance, I explain at ConservativeHome:
For decades, lancing the ugly boil of National Insurance from the none-too-pretty face of the British tax system has been on the wishlist of tax reform campaigners and payroll professionals. The complicated system of weekly ‘contributions’ has long since twisted out of its original insurance shape into the current reality of being just another tax on income. Different rules on things such as when it’s applied, who is liable, what is ‘employment’ and what’s allowable as an expense make for a nightmarishly fiddly system that’s a major headache for employers and anyone trying to work out how much they have to pay.
I wrote in CityAM about how our new How to abolish National Insurance report shows that it can be done in three simple steps:
AS GEORGE Osborne approaches his Autumn Statement, there’s reason to hope he may finally do something about a tax albatross that hangs around the necks of employers and workers alike: national insurance.
A consultation on integrating national insurance with income tax was first announced in the 2012 Budget, scheduled for this summer and then postponed until the autumn. It’s November now, and it still hasn’t been launched. There’s also been no word on the white paper on state pensions reform, which may involve decoupling pensions from national insurance contributions. These long delays suggest reform may finally be on the cards at last.