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10 January 2018

"Tax? As Flat as yer 'at."




This article was written by Fred Piechoczek. All views and opinions are strictly his own.

Comparing the amoeba to the human shows how evolution develops ever more complex life forms. The same is true of the tax system, which has levels of complexity unknown to Darwin when he did his tax return. Evolution incorporates efficiency and elegance into its structures that are in politico-corporate speak ‘fit for purpose’. The same is not true of the tax system, which owes more to Heath Robinson than to Darwin. Time for change.

Our taxation can be likened to three balls of wool: raising funds to run public society; promoting the economy; balancing wealth distribution. This happens in a dynamic environment where tax is part of the economic system it is influencing so that good outcomes are only weakly predictable. We have let the kittens play with these three balls of wool, and those of us with experience of untangling know that untangling is not the way to go.

To accomplish tax’s task to raise funds for the community, we need to consider how much is needed, how much is available and how to implement taxation. With no other factors taken into account, it is probably more efficient to tax income rather than expenditure with its heavier administration requirements.

As to tax’s second task of contributing to economic management, the answer is to leave that to market forces, which are going to win anyway. Tax manipulations are costly, ineffective and often wrong.

The third task is to avoid Mao’s Cultural Revolution. Universal suffrage works if the populace has a stake in society rather than just the elite. Spreading of wealth undoubtedly helps create more wealth. Democratic principles and wealth creation are the common features of the nations of the western world, which have the objective that wealth be shared with none left in poverty. Progressive taxes together with social security payments have been employed to achieve this laudable goal, but is this really the best way? An alternative of paying a basic salary to everyone, irrespective of whether they work, has been proposed as a solution to poverty, and it gives everyone a stake in society. It is simple approach without the heavy administration that comes with the social security net.  Some may object that no one would work if they have an independent income, but this need not be true. It comes down to changing attitudes. The fact is that society currently pays people who are out of work, but does so in an administratively costly and burdensome manner. Paying a basic salary can remove progressive social objectives from the tax system (apart from, perhaps, some form of inheritance tax to iron out cumulative wealth issues).

Having taken out the economic and the social aspects, this leaves us with a tax system stripped down to the bare requirement of raising funds to cover public expenditure. Now comes the question of tax bands. Should the wealthy pay away a larger proportion of their income? They are paying more tax anyway at the basic rate as it applies to a higher amount. What happens in practice with higher rate bands is that salaries rise to compensate for the tax burden. This results in few paying much tax in high tax bands and many paying little tax in low bands or falling below the threshold and paying nothing at all. We should give everyone the opportunity to pay tax and contribute to society.

There is a straightforward solution, which is flat tax. Flat tax has been examined at length and successfully employed in some economies. What it has going for it is simplicity and effectiveness, that allows an economy to hum. Flat tax on income for all is simple and elegant, eliminating the bureaucracy and costs of the current tax system. Calculation of the tax rate to cover requirements including a citizens’ base salary suggest a flat tax rate of 15%. A simple (not simplistic) solution - 15% for everyone and no allowances.

There are, of course, a large number of arguments that are raised against this approach, which are largely to do with loss of tax levied on high earners. This gives rise to the belief that insufficient tax will be raised to pay for essential services. This would be true if you took a simplistic mathematical approach based on the situation today, where much is paid to few, so that it can be taken back in tax. This disequilibrium has been growing and not shrinking, encouraged by high marginal tax rates. Revamping the system on the basis of flat tax provides a sound basis to achieve more equitable wealth distribution.

What needs to be funded out of tax revenues? The civil service, policing, the judiciary and defence lend themselves to public funding. Health and education have clear private bright spots that suggest state funding could be cut back. As to the utilities, railways and roads there is a debate to be had, given their performance in the private sector.

History suggests that parliamentarians believe adjustment of tax bands and introduction of new taxes results in higher tax revenues. This approach has put the UK in a world leading position, but only if ranked by number of words in the tax code. The interests and mechanics of the legislature are a problem for any proposed tax reform. This contrasts with, say, countries of the ex-USSR, which started with a clean slate from a taxation perspective, allowing them to introduce innovative and relatively straightforward tax systems. Otherwise, government, administration and tax revenues are so entwined, that ambitious attempts at reform are rare, but usually effective.

The UK does have a tax simplification committee (paid for out of taxes), but what is required is fundamental change, not production of reports and tinkering with existing taxes. Is there much hope of this happening, or should we, rather than embarking on something as fraught as tax reform, turn our attention to something simple, like deciding whether London needs any new airport runways?



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