My eyes glaze over every time I try to get to grips with the budget changes. We know that there is always an underlying political agenda, but that cannot explain the complexity in which these stipulations are shrouded.
If a household includes a person earning more than £50,000 it will lose 1 per cent of child benefit for every £100 earned above that, until they get to £60,000, when the benefit will be lost altogether. Even if you can’t understand the labyrinthine workings, it’s obviously just gesture-politics.
To say that all this is unprincipled lunacy is to state the obvious
We now have to pay full-rate VAT on food that, when sold, is hotter than the “ambient air temperature”. What if the supermarket queue is so long that your pie has cooled off by the time you get to checkout? To say that all this is unprincipled lunacy is to state the obvious, and there’s no shame in it any more.
Yes, I know – if you were a tax reformer, you wouldn’t start from here. You would think of Adam Smith’s “canons of taxation”: clarity, certainty, convenience to the taxpayer, economy of collection and not discouraging business. Then you would look at our mess, and despair.
Although we now have an Office of Tax Simplification, even the most obvious reforms recommended by it, such as merging income tax and NI, still flounder in the Treasury’s “to do” tray. So forget any reform or simplification that takes a “bottom-up” approach. What is needed is a huge vacuum cleaner that would suck up the 12,000 pages of garbage called the UK tax code, pulp it and use it as fertilizer.
Incentives: the key
Then you would start again. Tax rates must never be pitched at a level that discourages work. Tax at 100% will kill whatever is being taxed, and a rate of zero will raise no taxes anyway. The magic number lies between. Colbert, Louis XIV’s brilliant tax reformer, put it colourfully: “The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least amount of hissing.”
Courageous governments will trust the human instinct for industry and drive.
Courageous governments will trust the human instinct for industry and drive, and remove the shackles of high tax rates to unleash undreamed of levels of productivity. Historically, this has been the case in economies as diverse as those of Hong Kong, Iceland and Sweden, where low tax rates have triggered huge gains in tax yields.
The same philosophy followed in the wake of the communist collapse in Albania, Russia, Bulgaria, Czech, Ukraine, Hungary and Romania, with “flat” taxes of between 13% and 16% that permit no distortive reliefs. An IMF survey on flat taxes in 2008 reported increases in tax yields, economic growth and far greater compliance in every country that adopted it.
I well recall, from my early consultancy days, how the incentive of double-time piecework rates on Saturdays would keep factory workers away from the football game – but it was effective only when the employer undertook to pay the extra tax himself.
Everybody wins. More pay for the employees; more revenue for the exchequer; and the resulting hike in productivity easily absorbed the extra tax. This was the gift of tax-free pay, and it provides a classic illustration of how incentive psychology operates in the tax realm.