by Kieran Neild, grassroots assistant at the TaxPayers' Alliance
Taxation affects every part of our lives. Whether it's buying food, going on holiday or even taking home a paycheque - our income and consumption is touched in some way by HMRC. This is of course not a recent phenomenon. In a letter to French academic Jean-Baptiste Le Roy in 1789, Benjamin Franklin famously wrote: “In this world nothing can be said to be certain, except death and taxes”. Tax is a fact of life, and as taxpayers we should all understand what taxation is, how it affects our lives, why we need taxation and ultimately how we can improve our tax system to make all of our lives easier and more prosperous.
At a basic level, taxation is collected by the state to fund public services. Tax would fund the basic provisions needed to keep citizens safe, such as paying for police to enforce the law and a military to defend national borders. Now, the modern state is characterised by a plethora of publicly funded services such as welfare, education, roads and even broadcasting companies. The scope of taxpayer-funded services has expanded significantly and as a result, so has the machinery of government needed to administer these services.
It’s not rocket science to work out that as the government budget increases and the state provides more services, taxes must rise to cover the cost. But the big question we are left with is how does the state tax us, and which taxes are more harmful than others?
The government directly taxes us on our income with income tax and national insurance contributions. Despite the separate names and different histories, these two taxes are both now very similar. Income tax makes up the majority of the UK’s tax revenue and is progressive, meaning in layman's terms the tax gets progressively worse the more money you earn and the harder you work.
Let’s think of an illustrative example. A person earning £35,000 in 2020/2021 could take home £27,442 after paying £4,498 in income tax and £3,060 in national insurance a year. If this same person was to be promoted to a £50,000 job, the HM Treasury could take £7,498 income tax and £4,860 in national insurance, wilting down this impressive salary to a pre-tax take home of £37k.
Although there is a clear improvement in their income, the higher rate of income tax takes an even more substantial chunk away from the individual, eating into their personal achievement and hard work to climb the wage ladder. At very high levels, loopholes in the UK’s bloated and over complicated tax code allow individuals to disguise their income and therefore try to keep down the level of tax they pay. Understandably, this has caused huge public discontent in the direct taxation system. Lower taxes should not be an option for a few fortunate people, it should be the right of everyone to keep more of their own money in their pocket. When it comes to taxes on income, there can be no better guiding principle.
But that’s not the only kind of taxation. Just when you thought you had paid your due by waving goodbye to 20 or 40 per cent of your income, they come for you again by taxing your consumption - that is, the things you spend that money on. The standard rate of VAT is applied to a whole cohort of goods ranging from ice cream to clothing. The chancellor recently reduced standard VAT from 20 to 5 per cent in a welcome attempt to boost spending temporarily. But that won’t last forever. When the VAT holiday ends in January 2021, a 20 per cent rate will be levied on goods again, punishing taxpayers and businesses with unnecessary rate burdens. Consumption taxes will once again hit hard.
Tax on goods just increases deadweight loss, excluding many people from the market who would otherwise be able to consume the product had it not been for the meddling of HMRC. And it doesn't end there. Sin taxes are also levied on our guilty pleasures, aiming to deter us from buying unhealthy products. Whether it's sugary foods, or bad habits like smoking, we get charged extra. The state does not care for our personal freedom to consume whatever we want, even if we know the harmful effects it may have on our mind and body. It would rather cash in on your habits, stopping hard-working people from enjoying a guilty pleasure now and again by ramping up ever higher consumption taxes.
Even in death, we cannot escape the wrath of the taxman. After being taxed on everything you earn, eat, drink, wear, drive and live in, they come again to tax the inheritance you leave to your loved ones. The UK tax system is a sorry state of affairs. When it matters most, the state makes it hard at every stage for hard work to pay-off. The UK tax system constitutes a triple whammy, taxing our labour, consumption and death. It is time to end the tyranny of the tax system and reform the system for good.
So what is the alternative? We need a system which understands that a person's income is the product of their labour and it is not the default property of HM Treasury. We also need to reduce the burden of consumption taxes on hard-working people. It is simply not okay that we are taxed so massively on our income, and taxed again substantially on what we buy. Because of this system, the tax code itself is a 17,000 plus page-long minefield - twelve times the size of the King James Bible.
In a recent article, journalist Ed Conway brilliantly illustrates the battle between the values of direct and indirect taxation. The crux of his argument is that to encourage job growth and higher pay, a tax on income is a non-starter. Instead, taxation should primarily be levied on our purchases with a consumption tax. The attractiveness of this policy lies in the fact that the state taxes more of our money further down the chain. We may keep the entirety of our income, but we will only get taxed once we decide to spend our money - saving us from painful tax deductions on our payslips. At the TPA we share the desire to reduce the hit on direct income, acknowledging like Conway that direct taxation on individuals is an impediment to higher wages and more job opportunities.
But indirect taxes are not the only answer. We need to encourage success, reduce excessive burdens and simplify the tax system in Britain, all of which can work alongside a much simpler direct tax system. This is why we have long advocated for a single income tax. We propose that instead of taxing several streams of income, the state just taxes one stream, simplifying the way we are taxed and reducing the burden. Our report recommends abolishing income tax, employees’ and employers’ national insurance contributions, and merging them into a single tax on labour income with the highest marginal rate of tax at 30 per cent. By streamlining tax on income to just one tax and reducing rates, taxes will become simpler and fairer; and most importantly, will reward hard work.
Consumption taxes can come down too. With a reliable and clear VAT rate, free from fiddling and constant rises, we can end the destructive distortion of economic activity and the incessant interference with the cost of the living.
In addition, the TPA recommends abolishing the abhorrent inheritance tax along with stamp duty land tax and capital gains tax. Not only should individuals benefit from simpler and lower taxes, but so should business owners. Corporation tax and capital gains tax should be replaced with a single tax on capital income (dividends, interest and rent) at a rate of 30 per cent. If a company’s profits increase then they currently get taxed twice: once by corporation tax as profits, then again by capital gains tax because the rise in profits increases expected dividends and thereby increases the price of the shares producing a capital gain. Once again, these distortions should end.
By abolishing unpopular taxes and taxing individuals and business owners in a lower, simpler way, we can make our lives easier and more prosperous. Ideas like Conway’s, and our single income tax, clearly sets out a plan which ensures the state is properly funded, but taxpayers are not taken for a ride. We must aspire to a tax system that rewards hard work and leaves the individual able to spend more of their own money at the end of the month, instead of clobbering them across the different streams of economic activity that they undertake every day. If taxation and death are the only certainties in life, we must ensure that the former is lower, simpler and fairer. Or high taxes will be the death of us all.