John O’Connell is Chief Executive of the Taxpayers’ Alliance
Complexity costs money. Just ask a small business owner wading through regulations, or a manufacturer busily working out ways to streamline processes.
It applies to tax systems, too. In the past, while we might have had a complex tax code we were able to outperform other economies with our better legal system, a more skilled workforce, and superior infrastructure.
But emerging economies across the world are strengthening their legal systems, investing in infrastructure, and improving education. That means our ever-more unwieldy and cumbersome tax code is becoming harder to ignore.
Simplifying taxes is politically difficult. It might not bring about the immediate gains sought by politicians facing an electorate keen for quick turnarounds. Unpicking complexity is itself complex. Civil servants in the Treasury are usually hostile to anything that reduces income on their dated static models.
Brexit also presents challenges – when doesn’t it? So politicians will be on the lookout for short-term measures that boost growth and productivity too, given that No Deal is now a likely outcome.
This morning the TaxPayers’ Alliance published a briefing note on the tax changes we think will help in a No Deal scenario. In the event of the UK leaving the EU without a withdrawal agreement, rather than spending more taxpayers’ money, fiscal policy should be targeted at enhancing growth, productivity and business confidence.
Popular reforms targeted at five key taxes could provide a timely confidence boost among both businesses and consumers. A package of strategic tax cuts would also sharpen incentives across the economy, enhancing investment, productivity and earnings – surely the number one long-term economic priority after a decade of barely-existent growth.
For instance, we recommend cutting the business rate multiplier to 40p or 30p, depending on whether one goes for a moderate or strong response. The threshold for Stamp Duty Land Tax should be increased, ideally to £1 million. It’s a wildly damaging tax that should eventually be abolished. The annual investment allowance for corporation tax should be increased from £1 million to £5 million and the rate cut immediately to match Ireland’s at 12.5 per cent. Air Passenger Duty should be halved immediately to enhance UK international competitiveness, and Income Tax could also be cut.
We think of it as a ‘peace package’ of tax cuts – measures that would cut tax on investment when a factory in Stoke invests more in plant and machinery, creating local jobs for Leave voters; that would cut business rates for Islington coffee shops to reduce the price of a frothy hot drink for a metropolitan Remainer.
The Treasury mindset – helpfully perpetuated by the Institute for Fiscal Studies, the BBC and others – is that a package of changes like this will ‘cost’ money. If they mean less revenue in the short term for them, then yes, that’s true. But the language around tax cuts – ‘giveaways’ is another rage-inducer – tends to assume that the Government owns everyone’s money. They’re just occasionally kind enough to let us have a little of it.
Quite aside from the infuriatingly poor debate on the dynamic effects of tax changes, it’s important to stress that tax cuts of this kind would be good for growth and productivity, even if the computer’s static model says ‘no’ for year one. Stephen Herring, a former tax partner at BDO and a member of the TaxPayers’ Alliance Advisory Council, puts it best in the foreword for this paper, when he says we must target taxes that are “getting in the way of investment, earning, moving to take up new jobs or travelling to win export business and attracting tourists to the UK”.
So far, so good – if we must leave with No Deal, we go for growth. But if the Conservatives were to win the upcoming election, then reform and simplification should stay firmly on the table.
The TPA (along with the Institute of Directors) convened the 2020 Tax Commission back in 2012, and its final report, The Single Income Tax, is the most comprehensive piece of work done on tax reform by a centre-right body in the UK. The report argued for a much more modern tax system that raises £1 for every £3 in the broader economy. It recommends that taxes on capital and labour income disguised as business taxes should be abolished and replaced with a tax on distributed income, similar to the Estonian model, which usually scores at or near the top of competitiveness indices. The Commission proposed the abolition of transaction, wealth, and inheritance taxes too.
With this, eight taxes can be replaced with just one Single Income Tax (with built-in protections for groups such as pensioners), at a single, proportionate rate.
Tax changes should be anchored in a bigger picture of reducing the cost of complexity. In doing so, the UK would make itself far more competitive in a global economy that has many more big players operating within it. Whatever you think of Brexit, that has to be a prize worth fighting for.