Simpler taxes for easier public understanding

February 02, 2011 10:37 AM

The incredible complexity of Britain’s tax system doesn’t make life simple, either for those paying the taxes or even the tax collectors. But beyond the cost in lost economic growth, prosperity and jobs of high and complicated taxes there is another problem caused by Britain’s combination of high headline rates with extensive exemptions, reliefs and loopholes: public dissatisfaction.

Companies such as Vodafone and Boots have faced public criticism recently in part because the tax they pay measured as a proportion of their stated income has been significantly less than the headline rate of 28 per cent. There is no suggestion that they have evaded taxation. A spokesman for campaign group UK Uncut speaking on Monday night’s BBC Newsnight accepted that the companies’ tax planning measures were perfectly legal but nonetheless expressed dissatisfaction that companies were taking advantage of the tax rules rather than paying the full headline rate. It seems that tax predictability is not just an economic requirement that provides companies and individuals the confidence they need to make decisions and investment without the risk of not knowing how much of the pay-off they will keep. It is also a political one that is required to promote public trust and transparency in the system.

This is not a new idea. It was spelt out in 1776 by Adam Smith as one of four principles of taxation in his classic work The Wealth of Nations:
2. The tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person.

Complicated tax systems mean people cannot easily understand how much other people and companies will pay, leading to suspicions that some are not paying their ‘fair’ share. A simpler system with lower headline rates and fewer rules and reliefs would bring many economic benefits but would also narrow the gap between the percentage of incomes people and companies actually pay in tax and the headline rates which, in turn, would bring clarity to the public understanding of taxation and remove a source of misunderstanding and dissatisfaction with the system. And while a simpler system may always have some anomalies and won’t prevent wilful misunderstanding, it would make them fewer and smaller and reduce the scope for mistrust and misinformation that exists now.The incredible complexity of Britain’s tax system doesn’t make life simple, either for those paying the taxes or even the tax collectors. But beyond the cost in lost economic growth, prosperity and jobs of high and complicated taxes there is another problem caused by Britain’s combination of high headline rates with extensive exemptions, reliefs and loopholes: public dissatisfaction.

Companies such as Vodafone and Boots have faced public criticism recently in part because the tax they pay measured as a proportion of their stated income has been significantly less than the headline rate of 28 per cent. There is no suggestion that they have evaded taxation. A spokesman for campaign group UK Uncut speaking on Monday night’s BBC Newsnight accepted that the companies’ tax planning measures were perfectly legal but nonetheless expressed dissatisfaction that companies were taking advantage of the tax rules rather than paying the full headline rate. It seems that tax predictability is not just an economic requirement that provides companies and individuals the confidence they need to make decisions and investment without the risk of not knowing how much of the pay-off they will keep. It is also a political one that is required to promote public trust and transparency in the system.

This is not a new idea. It was spelt out in 1776 by Adam Smith as one of four principles of taxation in his classic work The Wealth of Nations:
2. The tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person.

Complicated tax systems mean people cannot easily understand how much other people and companies will pay, leading to suspicions that some are not paying their ‘fair’ share. A simpler system with lower headline rates and fewer rules and reliefs would bring many economic benefits but would also narrow the gap between the percentage of incomes people and companies actually pay in tax and the headline rates which, in turn, would bring clarity to the public understanding of taxation and remove a source of misunderstanding and dissatisfaction with the system. And while a simpler system may always have some anomalies and won’t prevent wilful misunderstanding, it would make them fewer and smaller and reduce the scope for mistrust and misinformation that exists now.

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