Wednesday, 29 February 2012

tax reform;

after reading this;  post I felt inclined to offer my thoughts on their suggestion.

I think there are several guiding principles that should be used to reform the system.

I agree that simple systems are better. They cost less to administer and have less room for manipulation. (the negative is that there is often perceived unfairness, but when schemes cost more to deliver than they administer any cross sectional benefit is clearly lost).

Tax shouldn't distort the economy too much, and certainly not in ways that create more imbalances or retard growth.

Proportionally more tax should be raised from the wealthiest people.

VAT, is a good tax. It is hard to avoid and easy to calculate and collect. If it distorts the economy, it lowers consumption, lowers imports and increases savings. Relatively good things for rebalancing the UK's economy. (there is also a good argument made by Greg Mankiw that VAT is an implicit wealth tax.)

Corporation Tax is a bad tax. It is hard to calculate given the enormous number of schemes and allowances. Zero corporation tax would massively reduce the amount of money spent collecting tax and the amount of money spent by firms trying to optimize their tax structure. It doesn't raise a huge amount of revenue, yet costs a fortune for both parties to administer.

Additionally it would attract investment into the UK and companies to set up here. It clearly has an impact on where corporations decide to locate as Ireland has demonstrated. 

Given that politically there is a desire to tax the wealthy proportionally more removing corporation tax also makes sense. If you own 1 share of Tesco or 1mm shares of Tesco, your capital pays the same rate of tax.

All companies have owners, and the taxation should be applied when people take their money out of a firm as income, be that through a dividend, salary or whatever mechanism they like.

I propose that all income should be taxed at the same rate. As unpopular as this will sound, this includes inheritance, dividends, interest payments, wages, capital gains, BIK, etc. This way there is no distortion of the economy, no creation of management companies so as to stamp income as dividends, no disguising capital gains, etc.

This should be very simple to calculate, and by bringing lots of different types of income together at one rate with one tax free allowance one should be able to lower the marginal tax rates to half their level and be revenue neutral.

I am quite interested to know of what the negative unintended consequences of such a system would be.
(Apart from it being a massive vote loser as almost every section of society could be convinced that it could be tweaked for their benefit).