Intellectually bankrupt and economically incoherent

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The Tories have published the findings of their Tax Reform Commission, which was, by the way wholly staffed by KPMG (I know, they asked to meet me, although I note they have ignored all I said). The recommendations are intellectually bankrupt and economically incoherent.

Let's take a starter:

While theoretically attractive, moving directly to a "pure" flat tax in the UK would not in practice be viable. Financing current levels of government expenditure would require a flat tax rate which would entail either undue risk with the public
finances or major cuts in expenditure or a steep increase in tax rates for those on low incomes or for middle earners. Nevertheless, many of the features of flatter taxes - simplicity, stability, a broader base, higher thresholds, fewer rates - can and should be actively pursued.

They say this just days after the IMF have shown that flat tax is an idea whose time has gone and which does not deliver the claimed benefits.

Then they note:

Tax reform can work. Many other countries have recently embarked on programmes of tax simplification, base broadening and rate reduction. Examples include Australia, New Zealand, the Netherlands and Ireland. These countries have cut their tax rates and simplified their tax systems. At the same time, they have achieved budget surpluses and enjoyed strong economic growth. This in turn has made further reform affordable.

I argued this point a while ago with one of George Osborne's tax advisers, a person of maybe 26 years of age who must have done terribly well at Balliol or wherever but clearly knew nothing of the real world. He was completely in awe of Ireland getting Google's head office when the UK did not. But what he, and the Tories show by the above statement is their simple naivety. New Zealand is a tax haven. The Netherlands is a tax haven. Ireland is a pariah state feeding itself by stealing the taxation revenues due to other states in the EU and US. These are not sustainable tax models for major economies. They are the actions of small states with limited economic activity of their own willing to steal from others and hoping to get away with it for a while. This is a zero sum game: it is the race to the bottom. And the Tories have bought it, hook line and sinker.

The let's look at their main recommendations in turn:

• Improving understanding of how tax affects economic growth.

This is main plank of the some pretty right wing think tanks who think this will prove that flat taxes work because they believe it shows that tax always harms the economy. There are two obvious conclusions. The first is that the Tories haven't given up the idea of flat taxes. The second is they still hate government.

• Reducing personal taxation

An interesting idea. But no clue is given as to how it is to be funded.

• Simplifying personal taxation. The basic rate of income tax and the savings rate should both be set at 20 per cent. The complex web of tax free employee benefits and allowances should be reviewed and, wherever possible, abolished. National insurance and income tax rules should be aligned with consideration being given to merging the two systems in the medium term.

A flat tax idea, of course. And note that the effect is to actually cut tax reliefs for ordinary working people. In addition merging tax and national insurance will have one certain outcome, which is that pensioners will pay more tax. So much for concern for the poor.

• Reducing business taxation. The main rate of corporation tax should be reduced to 25 per cent. Over time, there should be one rate of corporation tax of 20 per cent.

Now the Tories are showing their true colours. And since I've already shown that big business only pays at 22.3% on average in the UK a cut to 20% from 30% will actually, presumably, mean a real rate of 12.3%. Much lower than the tax rate for any individual of course and designed to keep business happy but also to make the rich richer and the poor poorer, because it's ordinary taxpayers who will pick up the bill for this. It al;so happens to be lower than Ireland. Is this a coincidence?

‚Ä¢ Simplifying business taxation. The corporate tax base should be broadened and tax rates reduced by replacing the complex schedular system with one based on accounting profit. The upper marginal rate of 32.75 per cent should be abolished so that all profits above £300,000 are charged at the main rate of corporation tax. The indexation allowance should be abolished. Full pooling of losses should be permitted. R&D tax credits and film tax credits should be abolished. Safe harbour rules should be introduced and a general anti-avoidance rule once substantial simplification has been achieved.

This is tinkering. And actually these changes will substantially cut tax bills, especially the change on losses. I note the commitment to a GAAR, but these don't work as accountants abuse all rules: it has to be a General Anti-Avoidance Principle. Finally, you introduce one of these to simplify things, not when you've achieved simplicity. The causation is wrong here, and on this logic will never happen.

• Reducing and simplifying capital taxation. A short-term capital gains tax which tapers to zero over ten years should replace the current complex system of taper relief and indexation. Inheritance tax should be abolished and replaced with a short-term capital gains tax on death (the family home would remain exempt from capital gains tax.) Stamp duty on UK shares should be abolished.

Or let's put it simply: let's make the rich richer and the poor poorer. Abolishing stamp duty will over inflate an already over inflated stock market and boost City earnings, pushing up house prices more, so denying ordinary people any chance of buying a home. There is no argument for abolishing Inheritance Tax unless you see no problem in an enormous wealth divide. The Tories clearly don't, and abolishing capital gains tax will be a tax avoiders charter.

• Reforming how tax law is made.

So what if the above is what you're going to do?

In summary, this is a disastrous tax package. It shows the Tories have not changed their spots. It shows they have no green credentials because this is all about stimulating growth which fuels global warming. And it shows they want to increase the divisions in our society.

I guess that's what I'd expect. From the Tories and KPMG.

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