Commentators are continuing to respond to the 2020 Tax Commission and one of the questions raised is whether the single rate of Income Tax we have proposed is really fair. There would be a big cut in the real Basic Rate, so low and middle income earners would be left with more money in their pockets, but it is a single rate rather than Basic, Higher and Additional Rate bands as we have now.
It is easy to get tangled up in the theory here, and we talk about a number of philosophical perspectives in the report, but I think the basic intuition is simple: if you earn twice as much, you should pay twice as much; if you earn ten times as much, you should pay ten times as much. What is so unfair about that?
That is how the tax system would work under the 2020 Tax Commission proposals except for a new, higher Personal Allowance so that people can earn enough to cover their basic needs without paying tax. It seems much less likely to produce unfair results than the current system which, with its different bands, produces some inequities that are very hard to justify.
We looked at a few examples in the report. For the sake of simplicity, ignore National Insurance for the minute and just assume an Income Tax with bands of 20 per cent, 40 per cent and 50 per cent at roughly the current thresholds:
Special allowances can be put in place, and to some extent have been, to correct for those inequities. But the underlying problem is that simple income bands cannot possibly reflect all of the differences in people’s circumstances. There are even more fundamental problems like differences in people’s preferences. Suppose one person chooses to do dull but important work as an actuary and gets paid a fair bit, another prefers to enjoy their life as an artist knowing that it will probably mean earning less. Is one or the other of them really better or worse off?
In the face of all that, the proportionate rate seems like a fair share and much more sensible than the current mess.
The critical thing is that it is a fair share that everyone pays, and is seen to pay. That is why the 2020 Tax Commission recommends a Single Income Tax that will be charged at the same rate on labour and capital income. No more paying through a company and thereby cutting your tax bills, as BBC and Department of Health executives are reported to have done. Writing for the Guardian, union mystic Richard Murphy lazily asserts that our new capital income tax would be “highly avoidable”.
He is wrong. The new tax would, for the first time, apply the same tax rate to share buybacks, carried interest, corporations financed through debt instead of equity and loads of other means by which some people currently minimise their tax bills. It makes the tax system much simpler but also far more comprehensive. Our report is the first to ever set out a concrete plan to produce a tax system that is neutral between all those streams of income. It is an innovative way to ensure that everyone pays their fair share, no more and no less.