The basis of a good tax system
Rebecca Benneyworth takes the long view on tax simplification. But where to start? She is delighted to discover that AccountingWEB members are right on the money!
Improvements to the tax system seem to be in vogue at present. We have the Office of Tax Simplification for a start. The Office was formed by the coalition government, for the life of the government “...to provide the government with independent advice on simplifying the UK tax system”. The Office has very recently published a list of 1,042 tax reliefs as a preliminary to making suggestions for simplification and rationalisation.
At the same time, we also have the new approach to tax policy making – another initiative introduced by the current government, albeit a much more “high level” strategy. The new approach is intended to support the Government’s ambition for a more predictable, stable and simple tax system:
- to increase predictability, the government will provide taxpayers with clarity on its approach and certainty on the future direction of the tax system;
- to increase stability, the government will slow down the rate of change to the tax code, focusing on fewer and better developed proposals supported by improved processes for changing tax law; and
- to increase simplicity, the government has confirmed its intention to create an independent Office of Tax Simplification.
This approach leads neatly into the longer periods for consultation on draft legislation – we shall see most of the content of Finance Bill 2011 over the next two months, in line with the new policy of confirming the majority of tax changes three months before they come into effect or publication of the Finance Bill in which they will be included. No longer will Finance Bills be passed through “on the nod” without adequate time for detailed scrutiny, as this work will have been carried out in advance.
And then we have the Mirrlees review, which reported last week. In producing a monumental report on the design of a good tax system, a team of academics including economists, and at least one leading tax barrister have specified how a good tax system should be designed, and then compared the elements of good design to the current UK tax system. Of course it is up to the Government whether it follows the advice of Sir James Mirlees team, but let us assume that it will.
Let’s look at what the Mirrlees team said about the essence of a good tax (and benefits) system:
- Taxes on earnings should be based around a progressive income tax with a transparent and coherent rate structure, with all income subject to the same rates
- A single integrated benefit for those with low income and/or high needs
- No transactional taxes
- Indirect taxes should be largely uniform – VAT on almost everything – with a small number of targeted exceptions on economic efficiency grounds
- Environmental taxes should target road congestion (not fuel use) and there should be a consistent price on carbon emissions
- For savings taxes, there should be no tax on normal savings returns, and low tax on dividends to bring the equivalent rate on dividends to the same as other income after recognising corporation tax paid
- A lifetime wealth transfer tax should replace IHT
- A single rate of corporation tax with no tax on the normal return on investment
- Equal treatment of income derived from employment, self employment and running a small company
Most members will be able to spot where the UK system does not meet the elements of a good tax system; for those who would like to read further – have a look at the Table on page 7. In fact the only aspect in which our current tax system meets the ideal is in “Additional taxes on alcohol and tobacco”. While some of the suggestions that the report puts forward might be regarded as controversial (a return to CTT – as they say everything comes back eventually – even flares!), one paragraph really struck me as spot on (page 9):
“We need to move away from pointless complexities such as that which sees the marginal rate rise from 40% to 60% at £100,000 of income before falling back to 40% at £112,950. More importantly, we need to move away from having separate systems of income tax and NICs, with different sets of rules and exemptions, pointlessly increasing administration and compliance costs and making the system less transparent.”
Well, even if the rest of the report is a little “academic”, that quote was enough for me to invest some serious time in looking at what the team propose.
So how does this all pull together?
I started to write an article on “My top 5 reliefs for abolition”. After all, with 1,042 to choose from I should have been able to find at least 5. But the more I studied the list of reliefs, the more the comments of Wild Billy came to mind. Let’s not play the numbers game, and simply boast that we have abolished 243 reliefs and thus simplified the tax system. If you really study the list (Excel download) the only ones I felt confident about abolishing were the ones I don’t really understand or have experience of – like number 7 “Aggregates levy – china clay or ball clay extraction and separation by-products”. Looks like a good candidate to me – but I haven’t the faintest idea what it does when it’s at home!
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At the same time I had been reading part of Mirrlees, and it struck me that possibly the only way forward is to move ahead on all fronts. Simplification is a much more challenging task than abolishing a couple (or couple of hundred) of reliefs – it would need an understanding of the design of a good tax system. Heaven knows whether government is prepared to commit to wholesale reform of this nature but we are not short on suggestions.
And as far as abolishing NIC is concerned – it might have taken a panel of academics a few years to suggest, but you heard it here on AccountingWEB first!
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Rebecca trained in London with Kidsons and, on qualifying, spent some time as Chief Accountant of a manufacturing company. She now has her own small practice in Gloucestershire that comprises of owner managed businesses and small companies.
She also lectures extensively for a range of professional bodies, accountancy firms,...