The sole aim of Tax Reform is to get in more taxes.
The UK is running a large deficit between what it receive in taxes and what it spends on services. Albeit money is cheap, it cannot go on for ever. With money so cheap it is an ideal time to make changes.
The tax code is now very complex and needs to be thrown out and replaced with a very simple model all can understand.
The reason it is so complicated is that successive, Labour and Conservative governments have given ‘tax breaks’ to their supporters to get elected. They have stayed in the code while new ones get invented.
The Hall Rabushka model is a place to start. This book on Flat Tax was published in 1985. It suits a closed continental economy like America but would need some changes for the English Economy. The difference being that getting in more taxes is competitive. It has nothing to do with ‘International cooperation on tax avoidance’.
However, the principal is that a tax return should be done on a post card is a good one. The post card looks like this: [with some simple numbers]
Total Annual Income £110,000
Tax free allowance 10,000
Net taxable income 100,000
Tax @ 25% 25.000
Post Tax income 85,000
The big note is that other than the tax-free allowance to keep the lowest paid out of the tax threshold there are no other allowances. The other reason to have a tax-free allowance is that it is expensive employing people to collect small amounts of tax.
The tax payer can do what he likes with his post tax income. He can give some of it to charity; save some for his pension or spend it. Whole industries like the pension industry, the charity industry, the ISA industry will not like it and do its best to stop it. The number of tax collectors and accountants who calculate tax will be reduced dramatically. They will not like it either. But the taxpayer will.
The Daily Telegraph did a tax computation on this taxpayer some years ago. By the time they used the current tax avoidance schemes, pension, ISA, EIS etc. They got his tax paid down to about £4,000. “Aggressive Tax Avoidance” is caused by Governments.
‘Trickle down’ and ‘Net Immigration’
When Mrs Thatcher reduced the top rate to 40% this idea was that this rich people with more money to spend would spend it in England so it will trickle down into the economy. What happened was ‘trickle out’. Net immigration is the difference between poor people coming into the country and rich people leaving it.
Tolerance and the Treasury model.
England is the most tolerant country in the world but there is an intolerance to ‘high earners and bankers’. As they must live in England to bank or play football they all pay tax. The Rich are in fact the business owners who live in Monaco or Switzerland. We want them back because we want their money. A straw poll of Verbier residents, who currently pay no tax, would pay 25 to 30 percent of their world-wide income for the right to live in England on the above model, subject to no inheritance tax. The Treasury model is a closed system and does not include this vast store of wealth that could be tapped.
Inheritance tax; in 1979 Mrs Thatcher abolished exchange control which was designed to stop money flowing out of the country. The result was that so much money flowed into the country that the Bank did not know what to do with it; and at $2.40 to the £.
Inheritance Tax currently produces about 3.5% of total revenue, and it costs an estimated 40% to collect. It is not much compared to the flow of money into the country if it were abolished. If we get these people back, we get 20% of all they spend. Trickle Down would finally work.
Chancellor Osborne always knew about this but was been too frit to do it. He had a go at limiting tax relief to charities and got roundly beaten. He wanted to reduce corporation tax but fears abolishing it on the Estonian model:
Siim Kallas in Estonia found that company tax was yielding the least revenue and abolished it. But with a twist! No company tax was to be charged on company profits that remained in the company or its subsidiaries, but taking money out of the company by way of dividend, director’s entertainment, cars etc was subject to the flat tax rate, then 26%. This was done by simply adding an extra line to the monthly VAT form. This had two magical effects; firstly, revenue came in immediately instead of an 18 month wait and as companies did not have to depress their profits, which any accountant can do, to avoid tax. They declared as much as they liked and in a year, this doubled the country’s GDP.
Nothing had changed but the GDP pundits thought it must be a great place to invest, which they did, making it a self-fulfilling win, win situation.
With the confidence that comes from having available new computer models it is the time for a body in the City to research and run it on a simplified basis on a totally fiscal and non-political basis.
The current guide to taxpayers is here.