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2020 Tax Commission

Mixed messages from the Government on tax transparency and simplification

Nov 14th, 2011
by Jonathan Isaby.
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Campaigning for the tax system to be more transparent and simpler has always been one of the core missions of the TaxPayers’ Alliance.

And so in broad terms we very much welcome the consultation which was launched this morning by Treasury Minister David Gauke entitled Modernising the administration of the personal tax system: Tax Transparency for Individuals.

The opening line of the document states:

“The Government wants to hear views on how increased transparency and accessibility to tax information can build greater awareness and understanding of how the system works.”

Frankly, it ought to read: “Increased transparency and accessibility to tax information DOES build greater awareness and understanding of how the system works – so we are going to get on and do it.”

Frustrations about the pace at which the wheels of government turn aside (the document is now subject to a 12-week consultation, which should at least allow the Chancellor to deliver some action in the Budget next March), most of the substance and direction of it is to be welcomed.

The Government is already looking at how in some other countries there are systems in operation whereby individuals can go online to see how much they are paying in tax month-by-month and year-on-year.

At the event launching the consultation this morning, David Gauke showed prepared mock-ups of what a personal HMRC web page could look like for Britons. This would enable people easily to see how much of their income goes on income tax and national insurance contributions – including the oft-forgotten employer’s element of the NICs. This would show people year-on-year whether they were paying more or less in tax and would indeed be a welcome leap forward in transparency. As this video produced by the Treasury itself demonstrates, there is widespread public ignorance about how much tax they are actually paying:

Also today, the Government published its latest position on the integration of the operation of income tax and National Insurance Contributions, in response to a consultation it held on the issue earlier this year.

The TaxPayers’ Alliance has called for a complete merger of National Insurance and Income Tax, as explained in our recent report, Abolish National Insurance, and that is what we recommended in our response to the consultation: National Insurance is almost indistinguishable from Income Tax in its function of raising revenue and the current system obscures public understanding of tax on earnings.

It is disappointing, therefore, that the Government has not been persuaded of the merits of this case, concluding as it does that that it wishes NICs to “retain an identity distinguishable from income tax” as part of maintaining the so-called contributory principle.

It does, however, accept that “closer integration of the operation of income tax and NICS has the potential to reduce burdens on business, remove economic distortions and improve fairness” – although does not foresee being able to implement any changes until “around 2017”.

At a time when businesses are crying out for red tape to be reduced, five years does seem an extraordinarily long time to wait for any action on this.

Robin Hood stole from the rich and gave to the poor, Bill Nighy would steal from savers and give to the politicians

Nov 3rd, 2011
by Matthew Sinclair.
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This evening, Channel 4 News at 7pm will be screening a debate between me and the actor Bill Nighy on proposals for a Financial Transactions, or Robin Hood, Tax.  UPDATE: You can watch the video after the break.

Bill Nighy wrote for the Guardian recently arguing that the Financial Transactions Tax was an all-round wonderful idea only scuppered by bankers not wanting to pay their way.  The reality couldn’t be further from the truth.  The reality is that the people who would pay this tax would be savers struggling to afford a comfortable retirement.  Already struggling with high inflation, they would be hit again as the share prices that underlie the performance of most pension funds would be depressed.  In the longer term, particularly if the tax isn’t applied globally, workers would suffer too with fewer opportunities and lower wages as investment went elsewhere.

Bill Nighy in a video promoting the "Robin Hood" Tax

He hides that problem with the misleading statement that according “to the IMF it would be paid predominantly by the richest”, which he then translates for the rest of his article into this money coming out of the pockets of the likes of Goldman Sachs executives.  The reality is that the IMF paper he is referring to says that burden would “fall on owners of traded securities, at the time the tax was introduced, as the value of stocks, bonds and derivatives subject to” the new tax.  In other words, savers.

Of course people with savings are generally significantly better off than those without them.  For example, people on benefits aren’t saving and their retirement income will depend on the level of state pension entitlements rather than investment returns.  The other group this won’t affect as much – though they are actually relatively well off – are public sector workers, whose unfunded, defined benefit pensions also aren’t dependent on investment returns.

Savers will pay and, while they are on average significantly better off than people who aren’t saving, they aren’t all plutocrats.  We are talking about plenty of normal people struggling to save and invest, to build up a pension fund and provide for themselves and their family.  This certainly isn’t a tax on the banks.

British politicians are constantly urging people to save, that’s why things like tax free ISAs are available.  Hitting them with a new tax would achieve precisely the opposite and further put people off putting money aside for their old age.  That means taxpayers will have to pick up the bill instead and poses a mortal threat to the long term stability of our public finances with an ageing population.

In the longer term, by making it more expensive for companies to raise finance this measure would depress investment.  Particularly in an open economy like ours, and if the tax wasn’t truly global, capital would “flow out until its after-tax return was restored to the world market level.”  Less investment means fewer jobs and lower wages.  As the IMF say: “In the long run, capital owners would therefore not bear the burden of the STT; it would fall on workers, who as a result of the smaller capital stock would be less productive and receive lower wages.”

Other countries have seen that these taxes don’t work.  Australia abolished a stamp duty on shares in 2001, for example.  The IMF reported that these taxes have been in steady decline internationally in recent years.  We do have a stamp duty on shares in Britain but it is a disastrously inefficient tax, despite some differences in the conditions making it less onerous than a pure transactions tax.

In 1999, researchers at the London School of Economics found that while other transaction costs for UK equities had more than halved while Stamp Duty had remained constant.  As the Forsyth Commission reported (pgs. 103-104), those higher transaction costs depress share prices by up to 10 per cent.  One study suggests that if it were abolished the increase in the market capitalisation of the FTSE All Share could be in the region of £150 billion.  That suggests the around £4 billion a year the tax raises is pretty poor value.  If the Robin Hood Tax is supposed to raise much more money than that, then it will do even more to destroy share prices.

And stamp duty on shares also makes it more expensive for companies to raise the finance they need to grow and compete with rivals abroad.  Oxera found that abolishing the tax would reduce the cost of equity by 7 to 8.5 per cent on average, but technology companies for example might pay up to 12 per cent less.  That means abolishing the tax would increase investment, and bring more jobs and higher wages for British workers.  Bill Nighy wants us to go in the opposite direction.

This tax would be bad for the City, but that doesn’t make it good for the rest of us.  It would be an immediate disaster for savers and a longer term disaster for workers.  It would also increase volatility in financial markets, as I have written before, thereby increasing risk.

And that’s before we get onto how the money will be spent.  Bill Nighy’s idea is that it will go on aid for poor countries.  But even if you think the rapidly rising development budget – while taxes are rising and spending is being cut here in Britain – isn’t enough, European politicians appear to have other plans.  They want to use it to finance their wasteful spending and grand plans in Brussels.  Is that where you want your savings spent?

This is a bad plan and the Government should reject it regardless of whether international agreement can be secured.

Yet another blunder by HMRC means over a million face an unwelcome bill

Oct 19th, 2011
by John O'Connell.
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This weekend, you may get an unwelcome letter on your doormat from the taxman. Thanks to yet another blunder over a million taxpayers will have to pay back an average of £600 each, including 150,000 pensioners. Excessive taxes, rising utility bills and excessive fuel duty are already hitting families hard, so the last thing they need is for HMRC to demand cash from them – particularly when it’s HMRC that made the blunder in the first place.

Unfortunately, this seems all too familiar. Just over a year ago an almost identical error occurred, affecting a similar number of taxpayers. The Public Accounts Committee also took HMRC to task, saying that they had caused “unacceptable uncertainty and inconvenience to the taxpayer.” Since then, many have appealed demands for repayment. Incredibly, according to reports, some appeals have been turned down because taxpayers ‘should have picked up’ on the errors.  With just under 70,000 staff – the same as the population of Doncaster – you’d have thought that sorting these things out was the job of this army of bureaucrats.

Why can’t HMRC get it right? Is it incompetent staff? Is it down to bad Government IT? The real answer is that the hideously complicated and labyrinthine tax system means that administering it is costly for taxpayers. And three times over too: once in the high taxes they pay as a result; twice in the even higher taxes to pay for enough staff to cope with it; and thrice in response to letters from the taxman asking them to cough up again. It’s simply not good enough, and minor tweaks to the tax system will not remedy these ills. We need significant tax reform that drastically simplifies the system and reduces the burden on ordinary families and everyday businesses. Look out for the report of the 2020 Tax Commission in the new year, which is working out the steps to get us there.

Institute of Directors maps out “The Route Back to Growth”

Oct 5th, 2011
by Rory Meakin.
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The Institute of Directors (IoD) has published ‘The Route Back to Growth’, a policy paper by the their new Director General Simon Walker, listing measures the Government should take to boost the UK’s faltering economic growth rate. Yesterday also saw the Chancellor of the Exchequer’s speech to the Conservative party conference in which he reaffirmed the Government’s commitment to its fiscal plan but revealed little new in the way of pro-growth and pro-enterprise measures.

The paper has 15 solid policy proposals on areas such as public sector performance, employment policy and taxation. Mr Walker explained the importance of the challenge to raise the UK rate growth rate:

No aspect of economic policy is more important than returning Britain to a growth trajectory. Without the belief that UK economic growth is expanding, confidence will wane, international investment will dwindle and British consumers and taxpayers will be left picking up the crumbs at the tables of faster growing competitors. The Government’s deficit reduction programme is a step in the right direction – but it must go faster and further before the economy is on track and prosperity returns.

Among the policy recommendations are: abolish of the 50p rate of Income Tax, continue cutting Corporation Tax to 15 per cent by 2020, limit public spending to 35 per cent of GDP by 2020, review EU directives to remove ‘gold plating’ of regulation, decentralise public sector pay bargaining and the introduction of ‘no fault dismissal’ for when work relationships have simply deteriorated beyond repair without fault being apportioned to a single person.

These are the sort of policies Mr Osborne should be studying in detail and implementing if he wants to get serious about growth. Creating a new ‘sub prime’ credit market in bonds for small business isn’t the solution to Britain’s economic problems. Freeing business from over-zealous regulation and over-complicated and burdensome taxation to create the prosperity we need is.

It’s not because they love Guinness

Sep 27th, 2011
by Emma Boon.
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Micro-blogging website Twitter is to set up a new HQ in Dublin and I’m willing to bet that it’s not because they love Guinness.

Ireland’s attractive 12.5 per cent corporate tax rate is bound to have been a big sweetener for the firm, which has been valued at upwards of £5 billion.

The news is a blow to the Treasury, who were hoping that a London office opened earlier this year would become Twitter’s European HQ. But catchy names, like Tech City and Silicon Roundabout, and even the irresistible allure of Boris Johnson are not going to be enough to convince the micro-blogging website to bring its money over here when our main rate of corporation tax is 26 per cent.

The list of internet firms who are now benefitting from Ireland’s lower corporation tax reads like the bookmarks menu on most people’s internet browsers: Google, Facebook, Amazon, Yahoo, eBay and Microsoft all have offices there, to name but a few. The presence of businesses like these means more jobs in Dublin. Google alone is one of Dublin’s biggest employers, with 2,200 staff.

With modern technology allowing them to work from almost anywhere in the world, companies like Twitter are not going to choose the UK without a more competitive corporate tax rate as an incentive. Read our briefing on corporation tax from Tax Commissioner Anthony J. Evans for more.

Ed Balls needs to rethink the growth plan he announced at Labour conference

Sep 27th, 2011
by Rory Meakin.
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Ed Balls rightly pointed out that the Coalition isn’t doing enough to create the conditions for growth in his speech to the Labour Party conference in Liverpool yesterday. However, his five-point plan for growth failed to meet the challenge he identified.

The shadow chancellor proposed five measures aimed at boosting growth. I’ve listed them below, along with what he should have suggested instead:

1. Repeat the Bankers’ Bonus Tax to pay for 25,000 subsidised homes.

High taxes solve no problems and are already deterring financial companies from remaining in the UK. A better solution would be to pass legislation preventing the Government from ever wasting taxpayers’ money on bailing out rotten financial institutions again. Meanwhile, a cut in Capital Gains Tax would do more to encourage more homes to be built.

2. Bring forward expenditure on major infrastructure projects to increase aggregate demand.

The problem isn’t a lack of demand. The problem is excess debt and misallocated resources. The solution to this problem isn’t in higher deficit spending, it’s in lower taxes and greater market discipline in the economy. A cut in Corporation Tax is the best way to encourage sensible investment in the economy.

3. Reassign home improvements and maintenance bills from the standard to the reduced (5 per cent) rate of VAT.

Lowering VAT is a laudable aim, but introducing new complexity by targeting specific types of goods will only add to distortions and compliance costs. A better tax cut in the housing market would be to abolish stamp duty. This would encourage people to move to where jobs are and stop taxes from getting in the way of the right homes going to the right owners as people’s circumstances change.

4. Reverse the VAT rise, taking it back to 17.5 per cent.

The shadow chancellor is right to point out that the Coalition were wrong to raise VAT, and he’s right to call for it to be reversed. But a better way to stimulate employment and help the poor would be to increase the personal allowance so that the poorest keep more of what they earn and aren’t penalised for working.

5. Provide a one year break from National Insurance for small firms taking on extra workers.

The Coalition have already attempted a similar scheme and the response has been very underwhelming. A one-off gimmick is not going to get people back into work. Better to cut National Insurance permanently and better still abolish it. Not just for small firms but all companies. We need jobs wherever they might be generated, not just from companies in politically popular sizes.

The immorality of the 50p rate

Sep 16th, 2011
by JP Floru.
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The 50p tax rate harms the poorest in society most. It can do so in two ways: their jobs may cease to exist or never be created; and because the poor end up paying a larger share of the total tax take. It is time for the Government to stand up for what is morally just and get rid of the 50p rate.

When you increase tax on the rich, they have less money to spend. So they cut back. What do they cut back on? They may reduce spending on luxury objects: not buy that painting or that antique chest. This is likely to be a minor change – their house may be full already. Or they may reduce spending on services. Restaurants may suffer in a minor way. Minor, because the rich still have to eat and typically do not have much time to cook for themselves.

Or perhaps they cut back on domestic staff: the window cleaner, the cleaner, the cook, the gardener. Precisely those jobs for which you do not need university degrees or a long CV. In other words: the jobs for the less well-off are the most likely to be dispensed with. Sometimes full national insurance paid jobs will be replaced by cash-in-hand jobs. Full time may become part-time – now entitling the cleaner to claim housing and other benefits. This is the trickle-down effect; so often derided, but a daily reality for those who have not many opportunities at the best of times.

A large number of studies have shown that if you cut tax for the highest earners, they end up paying a higher share of the total. The opposite is true, too: when you increase their taxes, the less well-of pay a higher share. This is because paying for tax experts who can find methods to avoid taxes becomes a more lucrative alternative than to pay the increased tax. In addition high earners (and companies) will flee – either in person, or with their capital. There is a lot of evidence that this is happening in the UK right now. Those who are no high earners therefore end up paying a larger share of the total tax take.

All this is made worse by the fact that the rate was introduced as a political measure. The fact there needs to be a review on whether it raises money demonstrates that there was no work done before its introduction to prove it would raise money. We need to say this loud and clear. Taxing high earners more does not make the rich suffer much: it’s the poor who end up poorer.

Treasury ‘call for evidence’ on merging National Insurance Contributions and Income Tax

Sep 14th, 2011
by Rory Meakin.
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In his Budget 2011 speech the Chancellor signalled his intention to look into the operation of Income Tax and National Insurance Contributions. HMRC and the Treasury launched a “Call for Evidence” which expires this Monday, 19th September. The consultation includes 14 questions which have been copied below. The first three are of general interest and are aimed at everyone, and the others are more technical, aimed at HR professionals and employers.

If you want to respond so policy-makers in Government know your thoughts about the complexity and burdens of running separate systems of taxing income, please email incometaxnics.simplification@hmtreasury.gsi.gov.uk with your comments. We have reproduced the questions below and, for the general interest questions, provided brief suggestions.

General interest questions:

1. The Government believes that integrating the operation of income tax and NICs may have the potential to remove distortions, reduce burdens on business and improve fairness. Do you have any comments on these objectives?
You might want to mention transparency, and suggest that this objective, along with the others listed, could be much more effectively achieved by considering employers’ National Insurance Contributions (NICs) as well as employees’ contributions.

2. Of the differences between income tax and NICs listed in Table 1.A (or any others that you consider important) which do you see as the most significant in terms of their impact on: a economic distortions; b burdens on employers; c fairness?
Again, employers’ NICs impact upon these criteria so you may want to mention them here, too.

3. What do you think are the most important steps that could be taken to reduce the effects on: a economic distortions; b burdens on employers; c fairness?
Would some degree of tinkering with the existing, complicated system be best or should the Government be bolder and abolish NICs altogether and adjust Income Tax accordingly?

Employers and Payroll Professionals:
4. Under the current system, how much staff time and/or other resource is required to carry out income tax and NICs processes? Please give a score on a scale from 1 to 5 where 1 is only a small amount of time/resource and 5 is a great deal of time/resource for each of the following:
a) Familiarisation: understanding HMRC’s requirements, legislation and guidance.
b) Retrieval of information: obtaining the information required to run a PAYE payroll.
c) Record keeping: maintaining the records needed for income and NICs purposes e.g. keeping copies of returns/letters where necessary.
d) Calculation: calculating and checking income tax and NICs due (including in-year and end of year processes).
e) Provision of information to HMRC: reporting of information to HMRC e.g. P45s for new employees.
f) Provision of information to employees: reporting and providing information to employees e.g. year end P60s.
g) Payment of liabilities: paying income tax and NICs to HMRC.
5. Which aspects of the current income tax and NICs process work well for your business?
6. Do you carry out income tax and NICs obligations together? Are there any elements you carry out separately?
7. What effect do differences between income tax and NICs have on wider payroll processes such as expenses and benefits, statutory payments and student loans deductions?
8. Which of the differences between income tax and NICs are dealt with largely automatically by payroll software and which require significant manual working? Where manual working is required how straight forward is this?
9. Are there particular issues that occur in the calculation of income tax and NICs?
10. How often is it necessary to correct income tax or NICs calculations and which are the most time consuming to correct?
11. Do you have any comments about difficulties in designing or using software resulting from the differences identified in Table 1.A (or any others that you consider important)?
12. What do you see as the main differences between income tax and NICs in relation to employees you have who work internationally?
13. Which of the differences outlined in question 12 are dealt with largely automatically by payroll software and which require significant manual working? Where manual working is required how straightforward is this?
14 Do you have any views on how the introduction of Real Time Information (RTI) may affect the cost and benefits of income tax and NICs integration?

Sunday Times says scrap 50p tax and raise the personal allowance

Sep 13th, 2011
by Rory Meakin.
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The Sunday Times has called (£) for the 50p top rate of Income Tax to be abolished. The lead editorial means the paper joins the ever-growing consensus that the rate is a political gimmick doing lasting economic damage and has to go as part of a package of measures to help get the economy back on track:

A simple cut in the 50p rate would look politically crass. But in a package that included higher tax allowances for the lower paid, a boost to spending on infrastructure and a bonfire of red tape, it would be effective and right. Nobody benefits from a tax that brings in no money and everyone suffers from the results of an uncompetitive economy.


The Sunday Times is right to acknowledge that it is unrealistic to expect the 50p rate to be abolished as a lone budgetary measure. Few would argue that when the Government do finally scrap the rate they should not also take other action to reduce the tax burden for those who do not earn over £150,000 per year.

The link to raising the personal allowance is an attractive proposition. In an interview with the New Statesman, Liberal Democrat Chief Secretary to the Treasury Danny Alexander said the ‘priority’ for tax cuts should be people on low and middle incomes. He said we should be:

trying to get to a situation where people in a full-time job on the minimum wage are paying no income tax at all.

Mr Alexander is right. The minimum wage is a flawed policy, but if it is there to indicate the bare minimum level of income someone needs to live off, it can’t be acceptable for the Government to take money from people earning below that amount. The implication from the Chief Secretary’s wording implies that he thinks the allowance should be raised to about £12,500, higher than the Coalition’s stated aim of £10,000 and the current level of £7,475.

The two proposals should be combined and announced in the Chancellor’s Autumn Statement. Removing the poorest from taxation altogether will go a long way to improve the lives of people who are currently in a welfare trap, boost economic activity and reduce welfare bills by restoring the incentives to work. Meanwhile, abolishing the 50p rate will help retain and attract the entrepreneurs, companies and investment which will create prosperity and jobs the economy desperately needs to haul itself out of its current stagnation.

Rapidly raising the personal allowance will be expensive and Britain’s huge budget deficit means it must be matched pound-for-pound by spending cuts to remain credible: there is simply no room for manoeuvre on this. Britain’s rapidly rising contributions to the EU, foreign aid and ‘ringfenced’ healthcare spending are all areas the Government should look at in order to reform the tax system. We can’t afford not to.

Top economists urge Chancellor to scrap 50p tax in Financial Times letter

Sep 7th, 2011
by Rory Meakin.
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Twenty top economists have written to the Financial Times urging the Government to scrap the 50p rate of income tax to boost economic growth. The letter adds weight to the growing consensus that the 50p rate is economically damaging and that it will fail to raise much for the Treasury, with some estimating the policy actually loses them tax revenue.

We are concerned that Britain’s 50p income tax is doing lasting damage to the UK economy. It gives the UK one of the highest personal tax regimes in the industrialised world, making it less competitive internationally and making us less attractive as a destination for both foreign investment and talented workers.


Since 1997, Britain’s place in the World Economic Forum’s low tax ranking has fallen from 4th to 95th as our competitors have reduced their tax burdens while we have increased ours. Britain urgently needs a radically simpler tax system with lower rates. But getting rid of a tax that probably doesn’t even raise any money for the Treasury has to be a policy priority for a Government that claims to be serious about growth.

We call on the government to drop the 50p tax at the earliest opportunity as part of a package of measures to stimulate growth. Only by returning to an internationally competitive tax regime will Britain enjoy long-term sustainable economic growth.

The authors of the letter, who come from a range of viewpoints on the spectrum of political-economic thought, are correct. The Government must not waste any more of Britain’s economic prospects on this economically damaging political gimmick. It’s time for the Government to get off the fence and explain with conviction why this tax is a bad idea. It’s time to scrap the 50p rate.

The 50p rate of income tax is unfair. Scrap it

Aug 26th, 2011
by Rory Meakin.
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Fairness is a concept most people rely on when thinking about how to set tax rates and who should pay what. Unfortunately, the quality of information about tax facts in the media is so poor that public understanding is frequently skewed and, as a result, people often argue for changes that contradict their principles.

Last week on Any Questions following a question about Warren Buffett’s call for the rich in the US to pay more tax, the discussion turned to the 50p rate in Britain. Katharine Birbalsingh, the teacher who famously spoke at the Conservative conference last year, made a point about fairness on the 50p rate most would agree with:

The system ought to be fair, it’s not fair if someone earning £40,000 is paying the same rate of tax as someone who’s earning £200,000. It just doesn’t sound right to me. Now, I take the point about wanting to attract people internationally and so on, but then perhaps we need to lower the rate for the ones in the middle and then it doesn’t need to be as high as 50 per cent for the top ones. But it just isn’t right that someone earning £40,000 and £200,000 should pay the same amount of tax. And absolutely I agree with Tim about the loopholes and so on. Clearly the people at the top aren’t paying very much at all and that’s a massive problem but the middle classes, the ordinary policemen and teachers and nurses are the people who pay the bulk of tax in this country and that just isn’t fair.

The first crucial point about people earning £200,000 and others earning £40,000 is that, if you abolished the 50p rate, they would still not pay either the same amount of tax or the same rate. Someone with a £40,000 salary would pay £6,505 in income tax, which equates to 16.3 per cent of that salary. Someone with a £200,000 salary would pay £73,000 income tax, which equates to 36.5 per cent of the salary. Even the marginal rates, the percentage you pay for each additional pound earned, are different: 20 and 40 per cent, respectively. As we go higher up the income scale, this relationship still holds.

Someone earning £45,000 would enter the 40 per cent income tax rate. If the 50p rate were abolished, they would pay the same marginal rate as someone earning £200,000. But they would still pay a much smaller amount representing a much lower rate. The individual on £45,000 would pay £8,010, or 17.8 per cent, compared to £73,000 (36.5 per cent) for the individual on £200,000.

Independent estimates suggest the 50p rate doesn’t raise any money for the Treasury at all, and I’ve discussed the unfairness of hitting people with a tax for no better reason than to make them suffer for the politics.co.uk website. I don’t think most people would think it unfair that someone earning £200,000 paid £73,000 (50p rate abolished) instead of £78,000 (with 50p rate) in income tax when the individual on £45,000 pays £8,010. But most of us do think it’s very unfair to clobber people with taxes that don’t even raise any money.

Warren Buffett is right that the poor shouldn’t pay more tax than the rich

Aug 23rd, 2011
by Rory Meakin.
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Last week Warren Buffet, the phenomenally successful American investor, called on the US government to stop ‘coddling’ the mega-rich and to raise taxes on those earning more than $1,000,000 a year.  In an article for the New York Times, the chairman of Berkshire Hathaway Inc told us that his personal income tax rate was much less than other employees in his office and, to help close the federal government’s vast deficit, that taxes ought to be higher on the richest to make real the pledge of shared sacrifice.

I know well many of the mega-rich and, by and large, they are very decent people. They love America and appreciate the opportunity this country has given them. Many have joined the Giving Pledge, promising to give most of their wealth to philanthropy. Most wouldn’t mind being told to pay more in taxes as well, particularly when so many of their fellow citizens are truly suffering.

I admire and respect Mr Buffett. And, unlike him, I don’t know any of the mega-rich. But I take him at his word that they are very decent people. However, the argument goes beyond the effects on behaviour Mr Buffett says higher taxes would have.

I have yet to see anyone — not even when capital gains rates were 39.9 per cent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off.

This is true, of course, but only because taxes can change whether or not an investment is sensible. Mr Buffett is not saying that investors have not shied away from value-destroying investments which would have been sensible were it not for taxes. Nor is he claiming that the mega-rich will not work less and devote more of their time to leisure pursuits.

There are plenty of flaws in Mr Buffett’s analysis that others have explored in detail. The American Enterprise Institute have pointed out that disproportionately large rewards are needed to encourage enterprise. Successful entrepreneurs are usually highly effective, capable people with access to well-paid jobs. Most entrepreneurs do not hit the jackpot and become mega-rich and plenty fail outright. To encourage them to abandon the security of the well-paid jobs they could have had requires, to put it bluntly, big fat rewards. Higher tax means lower rewards, and that means fewer entrepreneurs and start-up firms. When companies are in their formative stages, the entrepreneurs’ own capital is usually the first places entrepreneurs go to finance their expansion. Higher taxes mean less capital, and that means a less vigorously entrepreneurial, less prosperous economy and fewer new jobs.

On the Forbes site, Tim Worstall raised the interesting point that either corporate income tax is paid for by the shareholders, such as Mr Buffett, in which case his tax rate would be something like 46 per cent. Or it’s paid for by employees, in which case it’s a regressive, anti-jobs tax which falls on the working poor.

But for all that, Mr Buffett’s argument doesn’t lack appeal. He paid $6.9 million in tax last year. That’s a lot of money but only it’s just 17.4 per cent of his income. By comparison, the tax rates paid by those in his office ranged from 33 to 41 per cent. However, Ronald Reagan’s tax cuts in the 1980s showed that the best way to get the rich to pay more tax is to encourage them to earn more, not to confiscate more of what they already earn. After all, as this article for the Tax Foundation shows, the US collects a larger proportion of income and payroll taxes from the richest tenth of its population than any other OECD nation, 45 per cent. What’s more, it still collects more from the richest tenth even after you adjust for income inequality. In other words, it has the most effectively ‘progressive’ tax system in the developed world.

Ordinary taxpayers with heavy tax bills and financial worries about paying for the ordinary things in life will struggle to see the fairness in people like Warren Buffett paying a lower rate of tax than they do. There are two ways to solve that unfairness. Taking away more money from the rich and squeezing the economy isn’t the right way. Cutting taxes for the poor and middle classes and letting the economy thrive is.

Forget 20p, CPS report says, tax on income at basic rate is over 40p

Aug 19th, 2011
by Rory Meakin.
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The Centre for Policy Studies (CPS) have published a factsheet today on how much tax you really pay on your income. Ryan Bourne smashes the myth that tax rates in Britain are just 20, 40 and 50 per cent by combining the various taxes on income into a single “marginal effective tax rate”.

Income Tax, employees National Insurance and employers National Insurance are all combined and adjusted to calculate how much marginal tax people really pay at various levels. The results are a lot higher than most of the comment in the media would lead you to believe.

The real basic rate is 40.2p, not 20p. The real higher rate is 49.0p, not 40p. And the real additional rate is 57.8p, not 50p. But it gets worse than that. Those earning between £100,000 and £114,950 face a rate of 66.6 per cent because in this range £1 of the personal allowance of tax free income is withdrawn for every £2 earned at the same time as having to pay Income Tax and both National Insurance rates.

Worst of all, the greatest loss of income (including both taxes and welfare withdrawal) to the Treasury will fall on some low earners at 79.1 per cent, and that’s even after the Universal Credit has been introduced. Until then, the rate is an incredible 96 per cent. The Director of the CPS, Tim Knox, said:

This factsheet shows up some of the inadequacies and inconsistencies of the UK’s personal taxation system. But the most important aspect it highlights is the need for transparency. We should stop talking about a 20, 40 or 50 per cent tax band and accept that the real marginal rates are much higher.

It’s time for the tax system to be radically overhauled to make it simple, transparent and honest. Britain’s tax system now is none of those things: impossibly complicated, disgracefully opaque and public debate that borders on downright dishonest. It needs fundamental change.

The TaxPayers’ Alliance and Institute of Directors major joint project, the 2020 Tax Commission has been undertaking just this task since January and will publish a comprehensive review in Spring next year. In the meantime, we should at the very least insist politicians and media commentators acknowledge that tax at the basic rate is over 40 per cent, not 20.

Neither cows nor businesses pay tax

Aug 16th, 2011
by Rory Meakin.
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Who pays tax? The question isn’t as silly as it might first sound. A quote from the EconLog reproduced at Café Hayek drives the point home:

I remember that in addressing the issue in the 1980s, the late Herb Stein said that it’s as if people think that if the government imposed a tax on cows, the tax would be paid by the cows.

Not a taxpayer

Those who read the 2020 Tax Commission’s Briefing Note on Corporation Tax will be familiar with the concept. Its author, Anthony J Evans, wrote:

Corporations are legal fictions – in the same way that your television doesn’t pay the license fee, and your house doesn’t pay stamp duty, companies cannot ever pay tax, people do.

 

Also not taxpayers

Why has the US been downgraded from AAA and not the UK, and what will it mean for us?

Aug 6th, 2011
by Matthew Sinclair.
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The ratings agency Standard & Poor’s has downgraded United States sovereign debt overnight, from AAA to AA+.  They are one of the big three agencies alongside Moody’s and Fitch, so it is a significant and unprecedented step.  There are two obvious questions: Why has the US been downgraded and not Britain?  And, what does it mean for us?

In their statement about the downgrade Standard and Poor’s answer the first question.  Contrary to some early reports, they don’t attach particular blame to any party or ideology.  Their view is essentially that they don’t see the political will to take sufficient action to address the deficit there in the medium term:

When comparing the U.S. to sovereigns with ‘AAA’ long-term ratings that we view as relevant peers–Canada, France, Germany, and the U.K.–we also observe, based on our base case scenarios for each, that the trajectory of the U.S.’s net public debt is diverging from the others. Including the U.S., we estimate that these five sovereigns will have net general government debt to GDP ratios this year ranging from 34% (Canada) to 80% (the U.K.), with the U.S. debt burden at 74%. By 2015, we project that their net public debt to GDP ratios will range between 30% (lowest, Canada) and 83% (highest, France), with the U.S. debt burden at 79%. However, in contrast with the U.S., we project that the net public debt burdens of these other sovereigns will begin to decline, either before or by 2015.

Britain’s credibility has always rested on an assessment by the markets and the ratings agencies that people here do accept cuts are necessary.  As I quoted in How to Cut Public Spending, Moody’s specifically credited that as a key reason to maintain our AAA rating before the last election, despite the parties largely avoiding a serious and specific discussion of cuts at that point:

Moody’s assessment that the UK government exhibits a high degree of debt reversibility is supported by the trend over recent months towards an apparent consensus among the public that fiscal retrenchment (including cuts in expenditure) is both inevitable and desirable.

Thankfully the people we are borrowing so many billions from understand that most Britons do want to deal with the deficit, they trust that the irresponsible “no cuts” brigade are a small minority.

It will be Monday before we have a clear idea of what this means for Britain.  There are two key questions.

First whether the ratings agency is essentially following markets which have already priced in that US debt is a lot more risky than it used to be.  Or whether this is another event like the Lehman’s collapse or the events in Greece that alters investors’ perceptions of what is safe quite drastically, and therefore causes a lot of disruption in world markets.  We will find out on Monday.

The second question is whether or not the fact in itself that this debt is no longer unambiguously rated as AAA will force some institutional investors to move their money.  If all the agencies changed their ratings that would almost certainly be the case.  But if Moody’s and Fitch keep the US at AAA then it might not happen.  Again we will get a clearer picture on Monday.

It still looks like the eurozone’s problems are the biggest threat to the global economy right now.  Italy and Spain’s problems are much more urgent.

I don’t think this should change our policy priorities.  We still need to keep up the fiscal adjustment to maintain our credibility, so that ratings agencies don’t come to the same conclusions about our will to sort out our public finances they have come to about the US.  But also with so many dangers in the international economy we need supply side reforms to strengthen the underlying strength of our economy.  Not more spending, which is generally associated with lower economic growth, but improvements in incentives for people to work, invest and build businesses in Britain.  We can’t leave opportunities like more dramatic cuts in business taxes on the table and we need to look at the deeper reforms the 2020 Tax Commission is studying.

HMRC: Getting tax wrong since 2005… and earlier

Aug 1st, 2011
by Emma Boon.
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There was further embarrassment for the taxman this weekend after the Commons Treasury Committee criticised HM Revenue & Customs (HMRC) for poor performance and ‘endemic delays’.

HMRC was formed in 2005 when Inland Revenue and Her Majesty’s Customs and Excise were merged. Like the two organisations that were combined to form it, HMRC hasn’t always gotten things right and caused problems for millions of taxpayers in the process. This latest report by MPs was ordered after last year’s PAYE debacle when HMRC had to admit that 6 million people had been paying the wrong income tax in previous years.

Almost 1.5 million people had to pay back an average of £1,500 each, after being told they had been underpaying because of faulty calculations. At the time we were very critical of the tax office, and said that things had to improve. This newest report reveals that the department is in crisis and confirms they still aren’t getting it right – and taxpayers are the ones left to pick up the pieces.

Let’s not forget that isn’t even their biggest mistake, as John O’Connell blogged in February this year when the Public Accounts Committee criticised HMRC for their mismanagement of the tax system and a few years before that the tax office lost 25 million taxpayers’ details that had been copied onto a disc – whoops!

Key complaints raised in this latest report were:

  • The continuing legacy of unresolved tax discrepancies from past years still affecting millions of tax payers
  • Taxpayers had to wait as long as three months just to receive a reply to a letter
  • Excessive reliance on the internet for filing tax returns, or giving information, to the disadvantage of those without good internet connections, such as the elderly
  • “Overly ambitious” IT projects such as plans to make employers submit “real-time” data for the PAYE system
  • Increasingly complex tax laws.
  • Just 48 per cent of telephone calls made to HMRC offices are answered
  • The use of 0845 phone numbers by HMRC for customer queries. The committee suggested that cheaper 0345 numbers are used.

We can't go on like this, with a tax system in total disarray

We cannot go on with the system in total disarray like this, it’s failing millions of taxpayers and we’ve put up with too many mistakes and excuses for too long. Last time it was a new IT system that was blamed, now it is staff shortages. Enough is enough.

At least after this most recent debacle Mike Clasper, chairman of HM Revenue & Customs, came out and apologised. Last year it took Dave Hartnett a full day to put his hands up and say sorry, after initially telling the BBC that he “had nothing to apologise for”. The attitude may have changed, but the problems still remain. It is too hard to make contact with HMRC, and it is often too difficult to understand the information and guidance.

The problem of increasingly complex tax laws, highlighted by the committee, is one that we have been shouting about since our inception. The 2020 Tax Commission (a joint project with the Institute of Directors) will release a report early next year that will look at ways to address this and other problems with our tax system. We released a video featuring the world’s fastest speaker to underline how long the UK tax code now is.

The taxman must get his house in order, taxpayers should not have to tolerate another fiasco.

National Insurance holiday scheme still a flop, says Balls. Time to cut it, Osborne

Aug 1st, 2011
by Rory Meakin.
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The Government’s National Insurance holiday scheme is a “total flop”, according to Shadow Chancellor of the Exchequer Ed Balls. The scheme, which exempts small firms (those with 10 or fewer staff) from having to pay National Insurance for a 12 month period, has attracted just 5,000 registrations out of a total of 400,000 expected to benefit from the scheme.

“George Osborne hailed this flagship policy last year saying it could create 800,000 private sector jobs. But it’s turned out to be a total flop with just 1 per cent of the 400,000 businesses George Osborne said would benefit taking advantage”.

This should come as no surprise. The scheme only applies for 12 months and doesn’t apply in the areas most likely to generate new business; London, the South East and Eastern regions of England. As I wrote back in February, the Chancellor should learn from the mistakes of his predecessors and abandon the doomed-to-failure micro-managing from his Whitehall citadel.

Scheme "a total flop" says Balls

Back in February, the Treasury said it was “too early to tell” if the scheme was working. Now they say they are taking steps to “improve” the scheme and encourage more participation. It’s not too early to tell, now. The scheme has failed. But as the Treasury are in the mood for taking steps to improve the scheme, here’s a suggestion: reverse the rise you implemented in April.

National Insurance is among the worst forms of taxation in the current tax code. Outmoded, complex and arcane, National Insurance is a tax on jobs that mimics and duplicates Income Tax but manages to be even more damaging. Instead of fiddling about with pointless schemes such as this payment holiday, George Osborne should cut the rate for all businesses. Better still, he should abolish it altogether.

Boris Johnson agrees, lacklustre growth figures mean we need targeted tax cuts now

Jul 28th, 2011
by Rory Meakin.
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Figures released on Tuesday show the economy grew by just 0.2 per cent in the first quarter of this financial year. Initial estimates are usually revised up, subsequently. In addition, the Japanese tsunami and earthquake, the Royal Wedding, unseasonal heat and the delay in counting Olympic ticket sales have all been used by the ONS to save ministerial blushes for the disappointing figures. Is there really much of a macroeconomic impact from warm weather, for example? Wouldn’t spending simply be switched from heating and sweaters to ice-creams and shorts? But even ignoring all that the number is a serious disappointment, if not an unexpected one. Growth should be a lot higher and the Government’s continued high spending and failure to get to grips with supply side reforms is getting in the way. Ed Balls, the Shadow Chancellor of the Exchequer, voiced concern about the low figure:

“The economy has effectively flatlined for nine months and this is very bad news for jobs, living standards, business investment and for getting the deficit down”

At the same stage following the 1990-91 recession the economy was growing 5 times as fast as it is now. Fast growth following a recession should be expected, as depressed asset prices and wage levels tempt firms to make use of the capacity freed up during the contraction. Despite the rhetoric surrounding supposed cuts, the Government has continued to increase spending which has meant it is still employing staff, occupying offices and purchasing the supplies that would normally now be in the process of being reallocated into more productive and efficient use by price signals and market forces. With the Government still spending over half of the economy’s output, the room for the private sector to generate economic growth is much smaller than back in the early 1990s when the Government’s share was closer to 40 per cent.

Quarterly economic growth, 2007-11 and 1990-94

Research has shown that an economy with a 10 per cent higher share of GDP being consumed by government will suffer from growth rate approximately 1 per cent lower than otherwise. But it’s not just aggregate spending figures which have conspired to fetter the nation’s economic prospects. The cumulative effect of two decades of gold-plated regulations from Whitehall and Brussels and tougher planning restrictions have also served to restrict the economy’s ability to adapt to changing conditions and preferences in society. Cities of London and Westminster MP, Mark Field, has highlighted the need for loosening the restrictions in the economy:

“As a matter of urgency we need to start implementing micro or supply side initiatives designed to free up small and medium size enterprises (SMEs). We have to ‘think the unthinkable’ and cut the regulatory and taxation framework which hinders many SMEs”

Fortunately, what needs to be done is not terribly unthinkable. On the regulatory front, hack back the thicket of over-zealous box-ticking regulations in town planning, health and safety and labour markets. Unwinding those regulations back to a sensible framework is no mean task but it is certainly not unthinkable. Similarly daunting is the task of overhauling Britain’s enormously over-complicated tax code. The 2020 Tax Commission , a major joint project with the Institute of Directors, is taking on this task and will produce a root-and-branch overhaul of the system in early 2012. But there are things that can and should be done right now, too.

Contributing to the ConservativeHome Growth Manifesto from London think tanks, Matt Sinclair, Director of the TaxPayers’ Alliance, said we should cut National Insurance, cut Corporation Tax faster and axe the 50p income tax band. Twelve other organisations contributed further pro-growth reforms that should give the Government plenty to be getting on with. Some, such as the European Trade Union Institute’s Duncan Weldon, at a BBC Radio 4 debate, have criticised the manifesto for not being a response to slow growth because we always propose such policies. The reason for this is simple. Supply side reforms always boost growth and we are always in favour of growth and prosperity, not just when the economy has been particularly wrecked by profligate spending, burdensome taxes and a mountain of debt.

Fortunately, the political momentum for tax cuts is growing and Mayor of London Boris Johnson called on the Government to scrap the 50p rate and cut National Insurance in yesterday’s Daily Telegraph:

“You’ve got to look at ways of stimulating growth now, and certainly I think you should look at National Insurance, you should look at ways of stimulating consumption confidence in the market”

Politicians from across the political spectrum who recognise the need for economic growth should join the Mayor of London in backing our proposed tax cuts.

Regulation hitting small firms

Jul 25th, 2011
by Matthew Sinclair.
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The Forum of Private Business (FPB) have released a new report, the latest in their quarterly Referendum series of member surveys.  This one is about the cost of compliance with regulation from health and safety to employment law and PAYE and National Insurance.  The FPB represent small firms who often particularly struggle with these requirements and incredibly regulations are costing the UK’s 1.17 million micro, small and medium sized employers an average of £25,500.

That means huge amounts of staff time that could have been spent growing the business, creating new job opportunities.  Billions spent on external help to deal with the more complicated rules, and make sure they are getting things like tax right.  The most onerous areas are health and safety, employment law and tax.

Health and safety regulations need to be closely scrutinised.  Any that have been in place for more than five years should be assessed to see if they have altered the trend in that area, has it actually made people healthier or reduced accidents?  The FPB found the cost of health and safety regulation is still rising which is incredible with manufacturing in long term decline as a share of employment.  It is also a particular problems for small but growing firms as the cost becomes a lot greater when they employ their fifth person, and face new requirements.  Do we want to put small companies off growing like that?

In employment law politicians really need to appreciate that what they think will “protect” jobs will often actually just stop people getting hired in the first place.  Small businesses in particular need flexibility to limit the financial risk when they take someone on.

Reducing the complexity of the tax system is difficult but vital.  That’s why we are running the 2020 Tax Commission which is going to set out a radical plan to reform taxes to improve incentives and make the whole system a lot simpler.

Too often calls to cut sharply cut red tape remain vague and therefore unproductive.  Hopefully with the 2020 Tax Commission and other projects we can start to set out concrete proposals to make Britain an easier place to grow a small business, and create new opportunities.

The 50p rate is an unaffordable gimmick. Abolish it

Jul 20th, 2011
by Rory Meakin.
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Jeremy Warner has added his voice to the campaign to abolish the 50p top rate of income tax. In a thoughtful article in yesterday’s Daily Telegraph, Mr Warner reaffirmed the growing consensus that far from raising any revenue for the Treasury, the 50p rate raises so little, if indeed it raises anything, that abolition would be unlikely to harm revenues.

“There isn’t much the UK can do about the stupidities of European policymakers, yet there are still things that can and indeed must be done to help ourselves. Targeted tax cuts are proven to incentivise enterprise, investment and growth, and there are at least two that could be enacted immediately in a manner unlikely to harm revenues.

“One would be to reverse the 50pc higher tax rate. A second would be to reintroduce 10pc taper relief for capital gains. It is logically absurd to have a tax system which is less favourable to top earners and business investment now when such tax breaks are really needed than it was during the boom, when arguably they weren’t. The motivation for imposing these higher rates was entirely political, and both are now almost certainly costing more money than they raise.”

Adele opposes the 50p rate

Hippocrates may not have actually said “first, do no harm” in his famous oath for doctors, but there’s certainly a good case for requiring Chancellors of the Exchequer to swear something along those lines before they can be allowed to get their hands on the keys to Number 11. But while this principle should apply whatever the economic circumstances, it is especially relevant now. The British economy is in the doldrums, weakened by taxes that are too high and too complex and asphyxiated by over-zealous regulation and red tape. The national finances are in a perilous state, with only the wafer-thin credibility of the Coalition Government’s austerity plan saving them from the fate of Ireland, Greece and Italy. We simply can’t afford expensive political gimmicks.

Jeremy Warner made the point that the inevitable puerile spin from abolishing the 50p top rate of tax must not deflect the Government from doing the right thing:

“In today’s febrile and hopelessly compromised political environment, it would require real courage to carry out a programme that would inevitably be dubbed tax breaks for the rich, yet without radical incentives for wealth and job creation, it’s hard to be optimistic for the future of our economy.”

Now must be the time to meet the political challenge for the national economic interest. The Government must no longer defend the indefensible: a tax that cannot even fulfil its primary objective of raising revenue. Abolish the 50p rate of income tax, Mr Osborne.

Even if businesses and entrepreneurs don’t move abroad, they may simply do less

Jul 19th, 2011
by John O'Connell.
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Yesterday’s City AM reported that over a quarter of large businesses are considering moving abroad, with most citing Britain’s high and complex taxes as the biggest reason. It would be disastrous if any of these companies follow through on that. Jobs would disappear and growth would be affected. The tax system – and especially punitive, political measures like the 50p rate – could drive individuals overseas too.

But that’s not the full story. Those that do decide to stay here may simply choose to do less. Uncertainty might force businesses to make more cautious decisions, when they may have otherwise taken decisions that created jobs in a more stable tax system.

All this is explained very well by Gregory Mankiw, a professor of economics at Harvard. In this article for the New York Times he gives a very simple and clear explanation why higher taxes will mean he might work less. The people who miss out are those that would have otherwise enjoyed or used the goods and services he would have produced.

When we talk about businesses or entrepreneurs moving abroad because of taxes, some say that these are non-stories, as it doesn’t really happen. City AM’s piece show that’s a real threat though. And what’s certainly true though is that even if they do stay, their decisions are distorted by the tax system. They may simply do less.

Why tax hikes aren’t the answer to our long term fiscal problems

Jul 14th, 2011
by Matthew Sinclair.
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The Office for Budget Responsibility seem to have inherited the unfortunate habit of the Institute for Fiscal Studies, who feel the need to express any fiscal gap in terms of the tax hike that would be needed to fix the situation.  Or at best talk neutrally about the amount that spending needs to be cut or taxes need to be raised.   In reality, as I set out in our response to that report, higher taxes will choke off economic growth and therefore do nothing for the Exchequer in the long run.  The empirical results surveyed and produced by Patrick Minford and Jiang Wang for the IEA report Sharper Axes, Lower Taxes launched yesterday evening reinforce that solid finding from the economic literature.

They report a number of other studies which have come to the same conclusion, and then their own results:

Overall, there is an overwhelmingly strong negative relationship between tax and growth, with some models showing a stronger relationship than others.  Specifically in our preferred model there is an elasticity of growth to tax of approximately -1.4 at the mean of the growth rate (1.6 per cent).  The effects are not expected to be linear in the tax rate but, if they were, then a fall in the tax rate by 25 per cent of its existing value (from 40 to 30 per cent) would lead to a rise in the growth rate to 2.7 per cent if the initial growth rate were 2 per cent.

2 per cent to 2.7 per cent might not sound like a lot but it is.  Over 30 years an economy growing at 2 per cent a year will grow by around 80 per cent, whereas an economy growing at 2.7 per cent a year will grow by more than 122 per cent.  That will erode most of the increase in revenue.  So even if you don’t specifically target tax cuts in order to maximise the dynamic returns, just the overall impact on the trend growth rate would almost pay for the tax cut on its own.  And everyone will be far more prosperous.

There are huge problems in the public finances.  Researchers at the Bank for International Settlements (BIS) found in March 2010 that Britain was, in terms of the projected share of GDP that could go on debt interest, facing the worst fiscal position of any of the developed countries they looked at.  The only way we will deal with that problem is by ensuring the Government lives within taxpayers’ means.  As the BIS researchers put it:

Taxes distort resource allocation, and can lead to lower levels of growth. Given the level of taxes in some countries, one has to wonder if further increases will actually raise revenue.

While there will be challenges financing substantial tax cuts in the short term, in the long term reforms to deliver lower and simpler taxes will deliver for the Exchequer as well as families and businesses.

No cuts, no growth, no surprise

Jul 11th, 2011
by Rory Meakin.
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John Redwood MP has an interesting blog today on the talk of downward revisions to growth over the weekend.

“I find it surprising that people are surprised that growth is slow. It all goes back to the misunderstanding about which sector, public or private, took the hit last year… the first Coalition year saw continued growth in overall public spending, along with substantial tax increases (imposed by both Labour and the Coalition governments) and a big surge in inflation.”

He needn't worry, spending's still growing

This has taken its toll on the economy. While fiscal contraction remains necessary to close the dangerously unsustainable deficit, it has largely come through tax rises rather than the public spending cuts the private sector needs if it is to grow. Those ‘cuts’ which have happened in the public sector have been outweighed by large increases in other areas so that the net effect has been that the only thing cut is the rate of increase in spending.

He also has something to say about what the Government should do about the mismatch between the two sectors:

“The continuing large fiscal stimulus did not work. We need a private sector stimulus, not more public spending. Constantly increasing public spending and borrowing can increase the squeeze on the private sector, as it is allied to present and future tax rises to pay for it all.”

The economy needs taxes to be cut and simplified. They’re too high and far too complicated. But it’s not just taxes which are choking off growth in the private sector. Regulation hurts, too. Measures such as abolishing restrictions on Sunday trading and loosening Britain’s notoriously restrictive planning regulations represent a ‘quick win’ the Government can achieve fast without necessary but politically difficult spending cuts. With some taxes such as the 50p rate which simply don’t raise much revenue at all (if any), there’s plenty the Government could be doing right now while it gets on with the cuts that have been talked about for so long.

Britain has a worse tax system than key competitors, says poll

Jun 20th, 2011
by John O'Connell.
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The Times has today published (£) the results of a poll by Populus, outlining the public’s perception of the UK’s tax system and other factors contributing to growth like education and skills. The poll looked at key competitors: Britain, the US, France, Germany, India and China. Out of these six, Britain didn’t rank well at all, coming dead last on tax questions:

Personal taxation: 6th
Taxes on wealth creation: 6th
Infrastructure: 4th
Skills level of workforce: 4th
Education system: 3rd
Place to set up and run a business: 4th

We’ve highlighted how horribly complicated and burdensome the tax system has become. There is plenty of research out there showing that high taxes stunt growth and choke off entrepreneurship. The 2020 Tax Commission is working on a major report with a plan to simplify the tax system.

And this poll adds weight to such research, because people’s opinions and perceptions matter. If a potential entrepreneur was among those polled, then there’s a good chance that they don’t think Britain is a good place to start up a business. A small businessman might not think it worth expanding. A CEO of a large company might consider relocating, taking jobs with him or her. The tax system in its current form will hinder any plan for growth.

This video shows how the tax code puts a Guinness World Record holder for speed reading to shame:

A Ben Nevis of mail

Jun 14th, 2011
by John O'Connell.
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An article in this week’s Sunday Times (not available online)  nicely captured how complex the tax system is. The paper enquired about how long it takes for staff to respond to mail from taxpayers; the outcome shouldn’t be surprising for those who have had to sit and wait for HMRC to get back to them. Staff told journalists that letters received at the start of this week may not be acted on until August. Letters they have outstanding stand taller than Ben Nevis.

I can answer this one, the rest are too complicated

Of course, this can cost individuals and small businesses money while they await the outcomes of their enquiries, appeals, or whatever the case may be. Not only that, it can cause quite a lot of stress, too.

The HMRC rep for the Public Commercial Services Union said the problems are down to HMRC not having enough staff. I’d say that the bewildering tax system is actually to blame. If we had a drastically simpler tax system then taxpayers and businesses would not have to write so many letters. Stories about HMRC over or underpaying taxpayers are all too common and they are apparently due to computer systems, not staff. The tax code is far too long. Simplify the system, cut out the mistakes and stop the letters. Make it easy for individuals and businesses to understand what they are paying, and how much. We need a simpler tax system, hopefully the 2020 Tax Commission the TaxPayers’ Alliance is running with the Institute of Directors can get us there.

See this video to find out how absurdly complicated the tax system has become

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