Why is it so difficult to have a sensible conversation about tax? After all, the questions are fairly easy to identify.
What do we want the UK tax system to do?
That’s not only about how much tax we need to raise, but also about who should pay how much tax, and on what. It’s also about the social goods which we want to achieve through the tax system by using tax reliefs and incentives. What sort of country do we want to be? Fairness and social justice are crucial.
Of course, the reality is rather more complicated. There is no agreement on what the level of government expenditure should be, how much tax should be raised and from whom.
Why can’t we have a sensible conversation about tax?
Surely, as a nation, we should be capable of having a sensible discussion about taxes? After all, taxes are currently running at around 37 per cent of GDP. Households the length and breadth of the country would take a long hard look at anything which cost almost 40 per cent of annual household income.
But, as the election campaign shows, it’s not even possible to have a sensible conversation about the most basic tax questions. For example, will income tax rates rise under a Conservative government? Defence Secretary Sir Michael Fallon recently said ‘the only way they can be sure their taxes won’t rise is to vote Conservative’. A Conservative spokesman quickly set the record straight: ‘we will always be the party that keeps tax as low as possible’.
In a changing environment and facing considerable future uncertainty before and after Brexit, why do so many people think it’s so awful to even contemplate a tax rise? And surely any future Chancellor of the Exchequer will want room to manoeuvre, raising taxes if necessary in line with the changing economic circumstances of the country.
What about fairness?
Beyond political platitudes such as ‘those with the broadest shoulders should bear the greatest load’ I have not found any politician willing to answer my question regarding what would be a fair proportion of total taxes to be paid by the top 10 per cent of earners. Or 5 per cent. Or 1 per cent.
What about new taxes?
The mere suggestion, identified by some observers in the small print of documents accompanying their manifesto, that a land value tax might be introduced by a Labour government produced a media storm. Foreign Secretary Boris Johnson railed against it, perhaps overlooking (or hoping that everybody else had overlooked) page 71 of the Conservative party manifesto which opens the door to a land value tax if the Conservatives are re-elected.
Don’t get me wrong. I’m not advocating increased taxation for its own sake. But the shrill defensiveness over tax increases which we are now seeing, coupled with the traditional British view that tax hikes are only acceptable if they are paid by somebody else, is seriously impeding the development of a tax system which is fit for purpose.
Why is the UK tax system so complex?
Parliament enacts hundreds of pages of new tax laws every year. Does the UK need so many tax reliefs? Would fewer reliefs, and the policing of those reliefs, produce a shorter tax code and lower tax rates? The UK needs a simpler system which is driven by evidence-based policies and is underpinned by a desire to achieve an integrated, stable and sensible whole.
People are losing faith in the UK tax system
Perceptions that some companies and individuals blatantly evade tax, or use tax rules to avoid tax unfairly, coupled with the never-ending changes in tax law, mean that people are losing faith in the tax system. By creating a simpler, stable, open and demonstrably fairer tax system, the new government has the opportunity to restore trust.
What about business taxes?
In the case of business taxes, we have to address three issues which reflect the UK’s status as a major global economic power:
1. First, should we continue to use the tax system to boost our international competitiveness through low corporate tax rates and other measures?
2. Whatever is decided, it is essential that the UK remains involved in BEPS so that we can continue to work on stamping out aggressive tax avoidance while ensuring that the tax system doesn’t create artificial barriers to growth; and
3. The existing, complex business tax regime impacts large and small companies alike. Now is the time to create a simpler tax code for smaller businesses.
Time to integrate income tax and National Insurance?
Integration offers the prospect of a massive simplification in the UK tax system. If we integrate income tax and National Insurance Contributions, we also have the opportunity to consider how we tax things like self-employed income, employment income, pensions, property income, interest, dividends, short-term capital gains and long-term capital gains. Matthew Taylor’s review of workers’ rights will have an important part to play in this, irrespective of which party forms the next government.
Changing EU-driven tax rules
• to treat EU-resident individuals and companies in the same way that we treat UK-resident individuals and companies; and
• comply with State Aid rules which have reined in some UK tax laws intended to boost the UK economy
have had wide-ranging effects. The potential lifting of State Aid and other restrictions provides an opportunity to restore these tax rules to the way the UK wanted them to be in the first place, and to develop more precisely focused regional tax policies within the UK.
The role of VAT
VAT is a European tax and there is every reason to believe that it will continue in a UK form after Brexit. It is also the single tax most likely to influence consumer spending and therefore the economic prospects of the UK. Its future scope, rate and interaction with European VAT must be considered with care.
Can the new government rise to the challenge?
So we have a magnificent opportunity to create a post-Brexit tax system which meets our future needs as a nation, and is much better at meeting those needs than the current system is now. But time is tight and resources are limited. Can Parliament rise to the challenge?
This piece was first published on RSM’s weekly tax briefing.