Tax: what it does do and what it should do

So I have just finished a set of tax exams, which I was sitting due to my second career as a tax advisor. This involved marking up hundreds of useful pages out of the thousands of mostly impenetrable pages of tax legislation, and trying to learn as many bits of dry, technical fact as I could stomach. In honesty, I can’t say I enjoyed it.

But here is a thing: the tax system is super complicated. And it gets more complicated every year, as each finance act amends existing legislation, and adds new. There are new political incentives every year, and there are anti-avoidance rules. The government needs to raise lots of revenue to pay for all our services and banking system debts, so we have relatively high taxes. But people don’t really like paying high taxes, so they have to put some effort into making the system a bit sneaky.

In the UK you pay income tax and national insurance on income, your employer pays a national insurance payroll tax on your salary, gains on capital assets are taxed via capital gains tax, VAT is levied on most business’s turnover (that’s your income without deductions for expenses), and corporation tax is levied on companies’ incomes after expenses. Then stamp duty is levied on land and share transactions, council tax is charged on the users of services related to real estate (perversely, we don’t have a property tax so even those who rent pay this tax), and then there are various duties levied on cigarettes, alcohol, petrol, air travel and so on.

By and large, the system isn’t all that good. It’s incoherent, it isn’t well understood, it is far too complicated–meaning that anyone with tax affairs that are not very simple has to engage an advisor. It must be terribly difficult for HMRC (that’s the government department for tax revenue) to review everyone’s returns as well, as I’m certain that not all their employees will be professionally qualified, plus those who are attempting to avoid or evade tax are probably not altogether forthright in disclosing how they came to the figures so artfully found in their tax returns.

So that’s a little introduction to the tax system. And now there is something else: tax is a big story in the UK just now. Corporates and individuals alike are liable to find themselves in the news if they don’t get their tax return right. And even if they do get it right, people may not be happy:

Amazon has courted unpopularity by setting up its base in low-tax Luxembourg, and benefiting from its 15% rate of VAT (outrageous! The UK hasn’t had a 15% rate for, what?, four years now!); Starbucks has offended the drinkers of cream and syrup based caffeine drinks by consistently making tax losses and hence not paying any corporation tax; global toy manufacturer Apple doesn’t pay corporate tax anywhere because of a mismatch between Irish and US tax law which means it technically doesn’t exist; Take That invested in Icebreaker, a scheme in the news the other day that generates fake tax losses through engaging in fake trading; and Chris Moyles tried to get a million pound tax deduction by claiming that he was a second hand car dealer, as well as a boorish DJ and failed television star.

So the government finds itself in a funny position. It wants to get the votes in by acting tough on all of the above, but remember, the Conservatives are the party of the rich. In fact, they are the rich. And they don’t like paying tax either. So in one chamber of parliament you have the Public Accounts Committee telling of accountants and berating business leaders, while in the other Osborne et al. are reducing the corporation tax rate to 20% from next April, down from 30% not that many years ago, and last year they cut the highest rate of income tax by 10% for the richest 1% of the population.

There are those that would claim that the UK is a tax haven. With our corporate tax rate on a par with Russia’s, and with a tax regime for those with a foreign domicile that is decidedly advantageous, as well as a low rate of capital gains tax, and many legal tax avoidance schemes that enable those with enough wealth to reduce their tax bills, it certainly would seem that way, for some.

Let’s look at the last budget for example. The budget for ‘savers’, said the chancellor. Two of the biggest items were the increase in ISA limits to £15,000 per annum, and the increase in the 10% rate of tax for savings income. ISAs are quite good things I suppose. I have one. It does encourage saving, and people should save if they can afford to. I reckon I can afford to save a few hundred pounds a year. Most people are in a similar position to me. Maybe people who earn a bit more, or spend a bit less on whisky and bicycle equipment, can save a bit more. Say, two or three thousand pounds.

To save £15,000 a year into your ISA, you have to be pretty rich. If you earned £40,000 your take-home pay after tax would be £30,000. Then you’d have to save half of that. Nobody saves half their income. So really we’re talking about a new tax advantage that is solely aimed at those earning £80,000 and above.

Now let’s inspect the increased 10% savings rate. This is a bit technical, but there are three types of income, non-savings income, which is employment, profits from trade, and property income. That is taxed first, so your personal allowance is set against that. Then there is savings income, which is the next to be taxed, and finally there is dividend income, which is the last bit to be taxed, and benefits from a lower tax rate (oh, and that’s the rate that tends to apply to the wealthy). Anyway, there is a small 10% rate that applies to savings. Currently £2,710. You only benefit from this rate if you have less that £12,710 of non-savings income. I really have no idea what the purpose of this rule is, but there you go, that’s the rule. Very few people benefit from it.

Now Osborne has increased that band from £2,710 to £5,000 and dropped the rate to zero. I guess he has done this because he figures that nearly everyone has NSI income greater than £15,000, so it will hardly benefit anyone, and hence won’t cost that much. But if you think about it2, who does stand to benefit? Basically the landed gentry. Investors, who do not work. Anyone who can earn £15,000 a year without going to office, e.g. just from bank deposits and shareholdings. These people can now take £15,000 a year tax free. And do you know what’s great?

They can stick all that tax free cash, every penny of it, into their swollen fat ISAs, and let it grow tax free for the rest of their puff, before their middle-aged children inherit it all, and we can really get on with recreating pre-Victorian England, with its feudal barons and hereditary careers, its super rich, and its impoverished masses.

A lot of people have been talking about wealth inequality lately–Thomas Piketty, Polly Toynbee, Owen Jones, the Occupy Wall Street movement. Even the Pope, a man who lives in a palace made of gold and marble, has been making noises about it. But the tax system continues to be skewed in the favour of the very wealthy, and does less than ever to reduce inequality.

One further example–one of the ones that seems to enrage middle England–is inheritance tax. IHT is paid at a rate of 40% of the death estate. But only where the estate is greater than £325,000 for a single person, or £650,000 for a married couple. Hardly anyone pays it. Most people just don’t have enough stuff. But people are outraged that anything should be paid at all. It is a double tax, they claim.

Well: the inheritors of things are receiving a windfall that they did nothing to earn at all. Would they prefer it was treated as non-savings income, and that they were taxed on it at their marginal rate? (This could work, and it would result in a good deal more taxation of death estates.) No, they just don’t want it taxed at all. So they can continue to benefit from the good fortune they had in being born to wealthy parents. So they can lock in that unearned advantage for further generations to come.

I can understand why people want that. Everyone has a selfish streak. But inherited wealth and power is at the expense of everyone else. It means that the powerful have different interests from the rest. It is not good for society.

I believe that tax needs to be reformed to deal with inequality. Since the FTSE was introduced in 1986, its top 100 share-listings have grown in value by 530%. In roughly the same time period (since 1985) UK salaries have increased by 275%. What this means is that the richest in society are taking a higher percentage of the value created in society. Salaries are not growing at the same speed as profits. The profits are retained by the owners. This is a redistribution of wealth from the poor to the rich.

Now changes to the UK tax system alone can’t stop this trend, but there are actions that could be taken. We could incentivise the payments of salaries by allowing super-deductions for salaries paid within a defined range, say between £20,000 and £60,000 per annum. So if you paid a worker a salary of 20,000 you would get a corporate tax deduction of 30,000. Suddenly businesses have a very good reason to increase the salaries of lower paid workers.

I would also change the way national insurance works. Absurdly, the basic rate is 12%, but this drops to 2% for those earning over about £42,000 a year. This tax should be made progressive, and merged with income tax. As I mentioned before, council tax is levied in an absurd manner. Why should a tenant pay a property tax? There should instead be a tax on wealth – perhaps similarly to the manner in which inheritance tax is levied on trusts every ten years.

I do not claim to have all the answers, just a vague Rawlsian idea that society would be better for everyone if nobody was very poor, and nobody was super rich, and a decent working knowledge of the UK tax system. I hope I have been able to elucidate just a bit of how outrageous that tax system is.

I am an amateur novelist, an aspiring tax advisor, a cycle commuter, and a graduate of philosophy, politics and law

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Posted in Politics and philosophy, Tax and law

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