The Chancellor this week was at great pains to stress that he wanted to create a ‘fair’ tax system. In itself this is hardly surprising: after all no Chancellor is ever going to stand up and say ‘My mission is to create an unfair tax system’. But ‘fair’ is one of those loaded words which depends on where you are standing.
A high earner might, perhaps with some justification, complain that it is not fair that the top one percent of earners pay 27 per cent of the total UK income tax. Somebody struggling on a low income might equally complain that they have to pay the same rate of VAT on clothes as somebody wearing designer dresses. So what does Mr Hammond mean when he talks about fairness?
Essentially he wants to create an environment where the way in which you receive income makes no difference to the tax or national insurance you pay. Historically there have been very good policy reasons why the self-employed, employees and those working through personal service companies have been taxed on different bases – not least because their entitlement to state benefits and legal protections was very different. The increases in national insurance for the self-employed and the increase in dividend tax are both mechanisms designed to erode, if not completely eliminate, the tax differentials. I have no doubt that we will see this trend continuing in future budgets – might we eventually go back to the system we had in the late 1980s when capital gains were taxed at the same rate as income: I would not rule it out completely.
As George has said in his introduction, some of the ‘unfairness’ which the Chancellor is addressing arises directly from government policy. After all the ‘unfairness’ of people being able to receive £5,000 of dividends free of tax was the precise intention of a policy decision made by the Chancellor’s predecessor less than two years ago! I am reminded of way that the previous government tried to tackle the abuse of ‘tax-motivated incorporations’ caused, not surprisingly, by people taking advantage of the policy of exempting the first £10,000 of profits from all corporation tax.
There is clearly some logic in the Chancellor’s aim of taxing the same level of income in the same way regardless of how it is earned. But there is a strong counter-argument that the self-employed should be given some form of fiscal incentive for the risk they run in carrying their own business rather than simply receiving a salary at the end of the month. For all the concerns about ‘false self-employment’ and the gig economy there are still millions of self-employed people out there running their own businesses – they may well think that it is not ‘fair’ that they have been caught up in the middle of all of the controversy and have been landed with a higher tax bill.
Fairness in tax is an elusive concept – by being ‘fair’ to everybody any Chancellor risks alienating those who don’t feel that they have got a fair outcome. In the end it is a political question as much as an economic one. Mr Hammond has obviously concluded that he has the political cover to make changes that previous Conservative chancellors might have been reluctant to take.
This piece was first published on RSM’s weekly tax briefing.