Tax simplification in Budget 2012 has been squandered

March 29, 2012 5:53 PM

The Government is defending new taxes on everything from pensioners' incomes to Cornish pasties on the grounds that they need to make the tax system fairer and simpler.  Unfortunately the Chartered Institute of Taxation has taken a look at the Finance Bill, the legislation that implements the changes announced, and found that it is the longest ever at 670 pages.  And Tim Wallace at City AM points out that there are another 508 pages of explanatory notes.  Of course, that doesn't necessarily mean that taxes aren't being simplified.  It probably would take a lot of legislation to fix Britain's dysfunctional tax code.  But the more you look at the detail of this Budget the more the complications look as significant as the simplifications.

Age-related allowances are going, for example.  That will simplify taxes, though there would have been much fairer ways to achieve that which didn't mean taxing some pensioners so much more.  But then at the same time the Government has introduced an overall limit on unlimited reliefs - for things like charitable donations and losses - that looks like it will be a disaster in practice.

Major charities are complaining that it will put them in serious trouble and very nasty results could be created for some people.  If someone makes a big gain one year, a big loss the next, but the relief on the loss is limited, then they could wind up paying loads of tax on no income.  There has to have been a better way of cracking down on exploitation of the rules, or looking at the fundamental problems in the tax system that created the loophole.

Some VAT reliefs are going on things like pasties and static caravans.  That will mean higher taxes for people who buy them and just move the goalposts, so that different distinctions between products create new complexities in the tax code.  All of a sudden the tax man has to care about the temperature of your pasty, for example, or it might still escape VAT.

Even if that does simplify the tax code.  Again it has to be balanced against the way they've addressed the very real problem of foreign buyers avoiding Stamp Duty.  They have made that tax, which the IFS Mirrlees Review had said should be abolished it is such a mess, even more complicated.  And they've also introduced a new wealth tax on an extremely small base, altering the basic principles of Britain's tax system to bring in £65 million, about 0.1 per cent of government revenue.  Again they could have found a fairer way of doing it.  Just close the Stamp Duty loophole itself, or ideally look at replacing that tax wholesale with new rules.

That is without even getting into the Child Benefit mess.

This was supposed to be a more careful Treasury, which was careful about fiddling with the tax system, to avoid nasty unintended consequences.  But instead it has managed to combine unpopular measures to simplify some taxes by making people pay more, with dramatic changes in legislation that make the system a lot more complex without achieving very much.  It all makes the good news which will mean most families pay less overall, like the increase in the Personal Allowance, fade into the background.

That's the problem with revenue neutral tax reform, it often creates lots of losers and new dysfunctions in the tax system no matter how much hard work politicians and officials put in during the run up to the Budget.  Tax reform without tax cuts tends to be a political nightmare.  But, at the same time, tax cuts without tax reform are a missed opportunity.  We need both.

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