Few people would argue that the UK tax system is either simple or fair. It seems to have many loopholes that stimulate jobs in creative accountancy, but deprive the nation of tax. It has sharp cut-offs instead of smooth gradients, creating problems for people whose income rises a few pounds above certain thresholds. We need taxation, but it needs to be fair and transparent, and what that means depends on your political allegiances, but there is some common ground. Most of us would prefer a simpler system than the ludicrously complicated one we have now and most of us would like a system that applies to everyone and avoids loopholes.
The rich are becoming ever richer, even during the economic problems (in fact some even appear to be using the recession as an excuse to depress wages for junior staff to increase company profits and thereby be rewarded more themselves). Some rich people pay their dues properly, some avoid paying taxes by roaming around the world, never staying anywhere long enough to incur local tax demands. It may be too hard to introduce global taxes, or to stop tax havens from operating, but it is possible to ensure that all income earned from sales in the UK is taxed here.
Ensuring full taxation
Electronic cash opens the potential for ensuring that all financial transactions in the country go through a tax gateway, which could immediately and at the point of transaction determine what tax is due and deduct it. If we want, a complex algorithm could be used, taking into account the circumstances of the agencies involved and the nature of the transaction – number crunching is very cheap and no human needs to be involved after the algorithms are determined so it could be virtually cost-free however complex. Or we could decide that the rate is a fixed percentage regardless of purpose. It doesn’t even have to threaten privacy, it could be totally anonymous if there are no different rates. With all transactions included, and the algorithms applying at point of transaction, there would be no need to know remember who is involved or why.
In favour of a flat tax
Different sorts of income sources are taxed differently today. It makes sense to me to have a single flat tax of rate for all income, whatever its source – why should it matter how you earn your income? Today, there are many rates and exceptions. Since people can take income by pay, dividends, capital gains, interest, gambling, lotteries, and inheritance, a fair system would just count it all up and tax it all at the same rate. This could apply to companies too, at the same rate, since some people own companies and money accumulating in them is part of their income. Ditto property development, any gains when selling or renting a property could be taxed at that rate. Company owners would be treated like everyone else, and pay on the same basis as employees.
I believe flat taxes are a good idea. They have been shown to work well in some countries, and can stimulate economic development. If there are no exceptions, if everyone must pay a fixed percentage of everything they get, then the rich still pay more tax, but are better incentivised to earn even more. Accountants wouldn’t be able to prevent rich people avoiding tax just by laundering it via different routes or relabelling it.
International experience suggests that a rate of around 20% would probably work. So, you’d pay 20% on everything you earn or your company earns, or you inherit, or win, or are given or whatever.
Some countries also tax capital, encouraging people to spend it rather than hoard, but this is an optional extra.
There is something quite appealing about a single rate of tax that applies to everyone and every institution for every transaction. Accountants who play the international systems to minimise taxes would have fewer opportunities, and any income earned in the UK would be taxed in the UK.
There are a few obvious problems that need solved. Husbands and wives would not be able to transfer money between them tax-free, nor parents giving pocket money, so perhaps we need to allow anyone tax-free interchange with their immediate family, as determine by birth, marriage or civil partnership. When people buy a new house, or change their share portfolio, perhaps it should just be on the value difference that the 20% would apply.
But the simpler and the fewer exceptions, the better.
So what about poorer people, how will they manage? The welfare system could be similarly simplified too. We can provide simply for those that need help by giving a base allowance to every adult, regardless of need, set so that if that is your only income, it would be sufficient to live modestly but in a dignified manner. Any money earned on top of that ensures that there is an incentive to work, and you won’t become poorer by earning a few pounds more and crossing some threshold.
There is also no need to have a zero tax threshold. People who earn enough not to need welfare would be paying tax according to their total income anyway, so it all sorts itself out. With everyone getting the same allowance, admin costs would be very low. This frees up more money so that the basic allowance can be more generous. Everyone benefits.
Children would also be provided with an allowance, which would go to their registered parent or guardian just as today. Again, since all income is taxed at the same rate regardless of source, there is no need to means test it.
There should be as few other benefits as possible. They shouldn’t be necessary if the tax and allowance rate is tuned correctly anyway. Those with specific needs, such as some disabled people, could be given what they need rather than a cash benefit, so that there is less incentive to cheat the system.
Such a system would reduce polarisation greatly. The extremes at the bottom would be guaranteed a decent income, while those at the top would be forced to pay their proper share of taxes, however they got their wealth. If they still manage to be rich, then their wealth will at least be fair. It also guarantees that everyone is better off if they work, and that no-one falls through the safety net.
If everyone gets the allowance, the flat tax rate would need to be set higher than 20%. Let’s play with a few numbers and set it at 25% to start. Let’s set the basic allowance at £8000. Someone out of work might get £8,000 per year. After tax at 25% that leaves £6000. Then they get a low paid job at £10,000 per year. Now on £18000 total, they end up with £13,500, a big incentive to take any work going. Mr Average, on £30,000 per year gets £38,000 including the allowance so ends up on £28,500. Mr Manager on £60,000 salary ends up with £51,000. With these figures anyone below average earnings would hardly pay any income tax, and those on much more will pay lots. The figures look generous, but company income and prices will adjust too, and that will also rebalance it a bit. It certainly needs tuned, but it could work.
In business, the 25% still applies to all transactions, and where there is some sort of swap, such as property or shares, then the tax would be on the value difference. So, in shops, direct debits, or internet purchases, that 25% would be rather higher than the VAT rate today, and other services would also attract the same rate. With no tax deductions or complex VAT rules, admin is easier but more things are taxed. This makes it harder for companies to avoid tax by being based overseas and that increased tax take directly from income to companies means that the tax needed from other routes falls. Then, with a re-balanced economy, and everyone paying on everything, the flat rate can be adjusted until the total national take is whatever is agreed by government.
This just has to be simpler, fairer, less wasteful and a better stimulus for hard work than the messy and unfair system we have now, full of opportunities to opt out at the top if you have a clever accountant and disincentives to work at the bottom.
I feel sure I have ignored some major factors. It is my first cut and I’ll probably tweak it later.