Paul Johnson of the Institute for Fiscal Studies has written an article for the FT this morning that says the UK tax system is a mess. For once I have to agree he's right. But there is a problem with this analysis. It lacks ambition.
He suggests that the tax system is a mess because it does not tax capital, and housing wealth in particular, sufficiently, And, he argues, pensions and ISAs now create perverse tax incentives that are deeply unjust intergenerationally.
It is hard to dispute this, but Johnson makes no real prescription for change. Nor does he look beyond this very particular issue. So let me go where he has not gone and say what needs to be done to make the UK tax system work.
First, it needs to be funded. HMRC needs to have the resources to collect tax from all who owe it. A level playing field where everyone who owes tax pays it is the prerequisite of social justice, fair trading and economic success. As Turkey is showing, the latter is especially important. No country can have macroeconomic success without collecting the tax due to it, and the UK can't be bothered to do that right now. This is especially disastrous for honest small business who are undermined by this policy. And do not doubt it is a policy. Investing in fair and appropriate tax collection is the most pro-business tax policy a government can run.
Second, we need more progressive income tax rates. This can be created, in part, by removing the absurd lower rates on higher incomes in the national insurance system, because NIC is just another income tax,
Third, the fact that NIC is only a tax on labour has to be corrected. When capital is undertaxed in every way this is absurd. So, anyone with investment income of more than £5,000 a year should be subject to an additional tax rate of 15% on the excess to level the playing field. Pensioners should have a higher allowance, but not be exempt above UK average earnings. Botched up measures, such as the dividend tax, should go as a result.
Fourth, council tax must be reformed. A revaluation would be a start. So would more higher rate bands help. Lower rates on lesser valued housing must be introduced. Land value tax should follow. Those mainly living on benefits should not pay.
Capital gains should be taxed as income. A small annual allowance should be used to avoid admin complexity, but that is it.
Capital gains should apply to houses on last disposal without reinvestment. This will usually be on the second death in a relationship that has owned property. Rules to cover earlier disposal will prevent abuse.
Inheritance tax needs radical reform. Many reliefs need to go. Most are abused. Bands should be progressive.
Many income tax reliefs also need to go. Pension and charitable tax giving reliefs need to be at basic rate only. The idea that we subsidise savings has to be consigned to history. Savings serve little macroeconomic purpose and providing tax breaks for the wealthy is socially unjust.
Corporation tax needs to be reformed. Small companies should have their rate aligned with the basic income tax rate. Dividends should be subject to an investment income tax, as noted above.
Large companies should pay a corporation tax premium over small business as they enjoy massive market advantages that they need to compensate for.
Large business should be taxed on an apportioned part of their worldwide profits to stop the artificial game playing with tax haven arrangements.
Payments by businesses to tax havens where economic justification cannot be proven by them should not be subject to tax relief in the UK until an apportioned tax base is introduced. The burden of proof must be on the companies.
In tax avoidance, a general anti-avoidance provision should be introduced and the burden of proof should be on the taxpayer to show that their arrangements had a commercial and not a tax avoidance motive when what appear to be artificial structures are used.
VAT exmeptions on activities that appear to most attract spending by those with wealth, such as private education and healthcare, should be ended.
The banking industry needs to be subject to a financial transaction tax on all flows to compensate for the lack of VAT paid by it. This would be progressive, and at very low rates for most UK households, but should rise in rate as flows increased. This tax should be charged to businesses and replace business rates. It would as a result charge large monopolies the most. It would level the playing field with online companies. Those companies and individuals seeking to move accounts out of the UK would be assessed to an additional UK income tax instead at an overall higher rate.
Additional revenues raised should be used to lower tax rates, most especially for those with lower income. This is not a plan to increase tax rates: it is a plan for a better tax system. All should gain from it. This means that in a nutshell this is a plan for tax reform that could really make the UK tax system, and its economy as well as its social structures work better.
It's time tne IFS was saying things like this. Most certainly it could be elaborated. And tweaked. but the principles on which change should be based are clear. It's time for them to be heard across the spectrum.
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Some typos for you:
collect fax -> tax
Capitall – capital
Largee -> large
exmeptions -> exemptions
chnage -> change
absed -> based
Amended
Thanks
Written in a mighty rush this morning….
“Written in a mighty rush this morning…”
I’m sure Pail Johnson would agree.
Do we need to tax income at all? On the principle of spend first and tax to control inflation and, above all, for better reasons than revenue collection. It is only higher incomes which need to be taxed because they are economic rent. Learning about MMT has relieved LVT campaigners of the necessity to introduce on a revenue neutral basis;o)
I can assure you we emphatically need an income tax
We cannot raise £750bn without one
And we will need to do that to control inflation
The vast majority of revenue from Income Tax comes from the higher tax bands. I agree with you that capital gains should just be added onto taxable income. Perhaps legacies too?
Carol
That is not true
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/710880/Table_2.5.pdf
It appears most is paid by those earning more than £50k
But a great deal of that is pai at lower rates
So, maintain the 40% rate and its threshold.
But why not higher rates to ensure redistribution?
What about the Non Dom’s, it is ridiculous that they have more favourable tax treatment than British citizens!
One of your recent posters suggested that the Non doms regime aided the City to attract the oligarchs and hot money launderers, another good reason perhaps to end this practice?
Good post Richard, I hope you can send this on to whoever the LP tax policy wonk is.
We live in hope.
I’ve wondered whether the biggest blind spot in our tax system is the lack of taxation of returns to capital via debt servicing costs. Companies have been taking on debt to buy back shares and pay dividends -so basically just converting their capital structure from equity to debt. If debt is held offshore, then interest payments are only taxed where the debt is held which may be in a tax haven. By taxing profits via corporation tax we are incentivising that restructuring and making firms more financially fragile as a result. Perhaps the way to deal with that is to use VAT as the way to tax capital. VAT may be levied at the point of consumption in many cases but it can be viewed as a tax on capital. Imagine say Starbucks who claim that they make little profit in the UK and so shouldn’t pay much corporation tax. They nevertheless transfer a lot of money to bond holders via debt servicing costs and that ultimately comes out of UK sales revenue. If VAT were much higher, then Starbucks would no more be able to pass that cost through to customers than they would be able to pass through any classic tax on capital (such as corporation tax or business rates or whatever). So in effect it would become a tax on bondholders even if those bonds were held in offshore tax havens. Nordic countries have had extremely high VAT rates and it seems to work there.
Interest is still a significant issue in tax abuse
But progress to tackle it has been and is being made
I don’t disagree with any of what you say but I believe it is too late to rescue the exiting tax system by altering it. It needs to be consigned to the dustbin in its entirety and replaced with a wholly new tax system, fit for purpose now and into the future. Only when this new system has been designed should we try to work out how to get from here to there.
In formulating the new tax system, we should ask and answer some very basic questions:
– Should we tax income (the fruits of effort and the creation of value) or wealth (passively sitting on the fruits of past efforts – usually someone else’s efforts)?
– If we are to tax income, maybe it should only be income in excess of the social enhancement resulting from the efforts made to generate it (i.e. nurses, teachers etc. get a large exemption or personal allowance but bookies, bankers etc. get a smaller one). Who gets to decide on the values?
– Should we have a flat rate consumption tax (e.g. something like the current VAT system)? If so, should some things be exempt (gambling, financial services etc.) and some things zero rated (lobster etc.) and some things taxable (hot pasties etc.)? If so, why?
– Should we have some kind of damage based consumption tax? – damage to the consumer (booze, fags, gambling etc.), damage to the environment (plastic etc.), damage to … the list could go on and one.
– A host of other fundamental questions.
I’ll stop now because I’m sure you can see my point. It is only when we throw off the shackles of familiarity that we can see the path ahead.
I will be both pragmatic and emphatic. You simply cannot scrap the whole system and start again. The tax system cannot withstand that degree of change in a go.
Sorry Richard, I don’t believe you read George the firsts post b4 responding…. The last sentence in his first para “Only when this new system has been designed……” does not imply a scrap and then think change…
Very interesting.
One question, can taxing businesses on an apportioned part of worldwide income work fairly in practice? Income and underlying profitability comes in so many shapes and sizes.
Companies act as single entities, allocating capital as if they are
Why should they not be taxed as such?
And is there really such variation?
Or is it constructed?
“First, it needs to be funded.” – perhaps the most important sentence and paragraph in the whole piece.
Can tax really be considered in isolation without regard to some kind of examination of incomes and benefits, and the way some benefits are actually a subsidy to employers so that they can continue to pay as little as they can? (I know you were looking purely at tax as a response to Johnson, so this is not a criticism)
But tax must also be as simple as possible, but no simpler, so that the army of “bean-counters” and their accomplices can’t subvert the purposes set out in Para 4, even as we shift the burden of tax avoidance proof onto the taxpayer.
The IFS is significantly funded by the ESRC which is predominantly funded by the UK Government which is controlled by the Tories. We have a saying in Scotland; he who pays the piper calls the tunes.
An interesting prescription for changes to the tax system.
I’m inclined to ask “And apart from that, what’s wrong with the present system? ” 🙂
Echoes of, ‘Apart from that, Mrs. Lincoln how did you enjoy the show?’ and ‘What did the bloody Romans ever do for us?’
It’s seeing life in terms of a comedy sketch that keeps me sane. But only barely so.
I shall copy this blog post as future reference, it may not be comprehensive, but it’s a good basis for overhauling a shameful shambles. And considering what is needed when creating a newly independent country.