Writing in the Times today, David Cameron made a moral case for cutting taxes. Good. It’s not heard often enough.
What is morally wrong is government spending money as if it grows on trees. Every single pound of public money started as private earning. Every million in the Treasury represents a huge amount of hard work: early morning alarms, long commutes, hours spent on the factory floor, the office, the hospital ward or the classroom.
Excellent stuff, Prime Minister. Almost as stirring as the essay by Eamonn Butler in our 2020 Tax Commission’s Single Income Tax. (Well worth reading if you haven’t already. It starts on page 79, download here).
There’s just one problem. The Coalition Government has hiked taxes as the figures below illustrate. And the Chancellor’s plans laid out in Budget 2014 involve hiking them again.
£513 billion in 2009-10, representing 36.5% of GDP
£648 billion in 2014-15, representing 37.0% of GDP
£778 billion in 2018-19, representing 38.1% of GDP
These numbers shouldn’t be going up, Mr Cameron. They should be coming down. We need you and all politicians to wage a War on Waste so that spending and tax can fall to 33 per cent of GDP. That would make room for the substantial and comprehensive reform set out by the 2020 Tax Commission that our bloated tax system so desperately needs.
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).
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.
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:
The OBR’s forecasts for CGT have been extremely optimistic:
Logic suggests the Government’s own calculations would suggest a 25 per rate, not 28 per cent
To increase revenues, rates should be cut
CGT severely distorts incentives and gums up markets. Rate hikes will make this even worse:
Consider this example:
It’s a double tax:
It’s a tax on inflation:
Lots of other countries don’t have CGT at all:
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.