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.
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.
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.
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.
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.
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.
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:
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.
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.
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 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.
It might not have felt like the most momentous morning yesterday underneath a particularly grim grey sky: according to the Adam Smith Institute, for the first time this year you were working for yourself not the Government. It took until May 28th, but the average worker has now paid off their share of the tax burden for the year. Somewhat terrifyingly, this represents progress; last year it was May 30th. The fruits of your labour were two days sooner in coming than last year.
Our tax code is almost designed to obscure quite how much tax is paid by ordinary British workers. Whilst headline rates of income tax grab the attention, at the moment too many taxes that really affect people’s standard of living are hidden away in higher prices, or disguised as levies on business. Employer’s National Insurance Contributions are essentially a tax on employing people – discouraging employers from hiring, of course, but also passed on to employees through lower salaries. By the time you’ve bought a tank of petrol and paid VAT on your shopping bill – with or without Labour’s now infamous VAT-exempt white asparagus – you’re paying through the nose in direct, indirect, and second-effect taxes. If you’re not convinced, in 2010 the TaxPayers’ Alliance worked out that the average working Briton is working for the taxman until 1:21pm on each and every day.
So what it is to be done? The 2020 Tax Commission, a joint project between the TaxPayers’ Alliance and the Institute of Directors, proposed a new tax system which pays for the essentials of state spending, and puts transparency at the heart of a simpler and fairer code. In short, marginal tax rates would be cut to 30 per cent with a corresponding hike in the personal allowance, and taxes on capital and labour income dressed up as business taxes should be replaced with a tax on distributed income. Unfair “double-taxes” like inheritance tax and stamp duty would be removed. Impartial Centre for Economic and Business Research CEBR modelling suggests the economy would be some 9.3 per cent larger in 2030 than the status quo, largely through boosting business investment. It’s a healthy reminder that no matter what Government programme (take your pick) is dreamed up in Whitehall, the easiest way to create much-needed business investment is to increase the potential rewards as a counterweight to the risks of investment.
Implementing the Single Income Tax would not be revenue neutral. It will require Government to prioritise essential spending over the extraneous programmes that have swollen the size of the state over numerous decades. The plan involves bringing Government spending down to 33 per cent of national income, balancing the budget and bringing the UK in line with Australia and Switzerland.
The Government has taken some positive steps. Despite party-political squabbling over who should get the credit, the rise in the personal allowance to £10,500 by next April is one of the triumphs of the Parliament, reducing the tax burden on the lowest paid. Critics might argue that it has only been paid for with benefit reductions, but it makes far more sense to leave people’s money in their own pocket rather than taking it with one and giving back with another. There has been an effective 20 per cent cut in fuel duty over the past four years, which the Treasury estimates will boost the economy by 0.3 to 0.5 per cent over the long term. It’s another example of lower taxes, encouraging growth, producing greater tax revenues. But these promising strides are not enough. There is much more to do.
In the back end of this year, the Chancellor will stand up and deliver one of the most important speeches of this Parliament, one which will go a long way to defining the legacy of this occasionally fractious but ultimately functional Coalition. On the one hand, he could deliver a radical shake-up of a 17,000-page tax code that looks increasingly unfit for purpose. He could close the loopholes that allow those who can afford to hire well-compensated accounts to find loopholes the size of a Take That tour bus, and give the British public confidence that everybody is paying their fair share. He could create a transparent tax system that lets everybody know exactly how much they’re paying by merging income tax and national insurance, and challenge taxpayers to call their elected representatives at local and national level to account if those taxes aren’t spent properly. He could create a system designed for taxpayers, not tax collectors.
Or he could tinker at the edges, move a few deckchairs, shift a few tax bands, and miss another opportunity to bring tax freedom to millions of people far earlier in the year than May 28th.
Every year, the Adam Smith Institute calculates Tax Freedom Day – the first day in the year when you finally begin to earn for yourself.
And today, May 28th, is that day. That means that you have worked 148 days of this year solely to pay your taxes.
We think that’s far too long. We want to see tax cuts so that people get to keep more of the money that they earned, to spend on their own families. It doesn’t make sesnse for politicians to take a huge chunk of cash from people’s pay cheques, then dish some of it out in grants and benefits.
Taxes are too high, too complicated and they need to be drastically reformed. Our 2020 Tax Commission – run jointly with the Institute of Directors – mapped out a plan for a simpler and less burdensome tax system. One that would mean you wouldn’t be working for 40 per cent of the year just for the tax man.
So Happy Tax Freedom Day. We hope it falls much earlier in the years to come.