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The Great Tax System Shambles

uk budget

This excellent report about the UK tax system by my friend Robin Mitchinson was originally published in his blog whydonttheylistentous. He does not live in the UK, but on the Isle of Man, a British tax haven.

Regime in the UK

The tax regime in the UK is a complete dog’s breakfast. It lacks logic, order and consistency, but with 11,520 pages it is the longest tax code in the world. It is highly desirable but equally unlikely that any Chancellor [finance minister] will ever have the courage to cut it down to size.

Of much greater importance than the sheer complexity of the code is that the general tax regime, regardless which party controls the government, is a huge economic handicap.

It imposes burdens on business that reduce competitiveness.

It creates parasites whose sole function is to find loopholes; they contribute nothing to the economy.

Most importantly, it heavily discriminates against the very people who are capable of making the greatest economic contribution – the ambitious, the aspirational, the upwardly-mobile. In short, Mondeo Man [roughly the British equivalent of Reagan Democrat in the US].

The entire system requires not so much reform as revolution.

Let’s get started with the permanently unpopular council [city] tax.

There are at least two major defects.

The first is that values are not based on reality. They are those laid down in 1991.

The second is that it is regressive — one of the criticisms of the older rating system that was abolished by the disastrous poll tax. Because it is assessed on property value and not on ability to pay, its impact falls most heavily on those least able to afford it.

One answer would be a hypothecated tax whereby the money need for local services is recovered through an income tax precept collected by HMRC [Britain’s IRS] and transferred to the local authority. For years the so-called public-sector financial experts have said [that would be] ‘unworkable’, despite the fact that it works perfectly well in some other countries. People then would be able to see exactly the cost of local authority services.

The business rate [local tax] needs reform at the same time. This is a major handicap for small businesses in particular, with the rate often exceeding the rent.

Next, income tax.

The top rate is 45 per cent, right? Wrong. For those family people earning between £50,000 and £120,000 the rate can be closer to 60 per cent when the progressive withdrawal of child benefit is added to the equation. Add in National Insurance and the top rate now exceeds 70per cent for a family with four children.

Labour’s proposed 50 per cent top rate is purely class-warfare; it will raise almost no revenue. Someone should explain the Laffer Curve to Ed [Opposition leader Ed Miliband].

There are now 5.3 million higher-rate income-tax payers, up from around 2 million.

National Insurance is a scam. It was introduced to pay for pensions and other welfare benefits. For years. Like the Road Fund, it has been systematically plundered by Chancellors [finance ministers] who use it as yet another stealth-tax.

Then there is inheritance tax, a deeply unjust levy.

It does not hit the seriously wealthy. They can easily hold their assets in trusts, offshore companies, and other ‘tax efficient vehicles’.  Once again the primary victims are ‘people of the middling sort’ whose principal wealth is their house, an easy catch for the tax-man. And this is tax on tax, because the assets have been accumulated out of taxed income.

Capital gains tax raises only 1 per cent of total revenues, but it is quite a handy tax-dodge if revenue can be converted into capital.

VAT is an absurdity, and it was no more than poetic justice that [finance minister George] Osborne was seriously embarrassed by the Pasty-tax Fiasco. A chocolate-covered ginger-bread man is loaded with 20 per cent VAT. If only his eyes are chocolate, he is VAT-free. It really is that barmy.

The serious issue is that the tax-base is very narrow, with rafts of exemptions.  Broadening the base might allow for the total abolition of corporation tax.

Stamp duty [on property transfers] is an anachronism. It was introduced in 1694. It is a fetter on land transactions, and high time it was pensioned-off.

But it will all be a case of plus ça change.

The Isle of Man has zero corporation tax, no inheritance tax, a top rate income tax of 20 per cent, 3 per cent GDP growth even in these straitened times, about 2.5 per cent unemployment.

I’m all right, Jack!

copyright: Martin Spring of OnTarget

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