The row over changes to National Insurance in the Budget is another sign of political gridlock failing to resolve inequities in the tax system. Isn’t it time to burn the entire tax code and start again with a simple flat tax?
Last week’s Budget began to unravel within hours because of a row over National Insurance. Isn’t it time for a simple flat tax on personal income, so everyone pays the same rate regardless of how they earn their money?
Hi. I’m Leon Hawthorne. We’re talking about taxes on personal income; and how to reform the tax code to make it more fair and more efficient.
This is the UK tax code. Well it was before last week’s Budget. You can probably add a few hundred more pages now. No wonder it’s so easy for rich people to legally avoid paying their fair share of tax. If you can afford it, just hire a lawyer or an accountant and he’ll find a million loopholes, so you don’t pay the same rate as those poor mugs on PAYE.
Last week, the Chancellor made an attempt to even things out. He plans to raise National Insurance paid by self employed people, so they more closely match the rates paid by ordinary employees.
But this is just tinkering around at the edges. Each little tweak results in a loud yell from one special interest group or another. The rule is people who benefit from the Budget stay silent, while people who lose out kick up a stink in the papers. These are the same people who say we should spend more on the NHS… just as long as somebody else pays.
This leads most politicians to do very little; or add new exemptions to each tax change to soften the blow… all the while making the tax code longer and more complex.
Here’s my suggestion. Don’t reform the tax code. Just burn it. Repeal every tax law that’s been made in the past one thousand years with a one line Bill and start from scratch.
Currently, the basic rate of income tax is 20%; and most employees pay 12% National Insurance on top of that.
There’s no real difference between these two taxes. Obviously, they should be merged into a single tax at 32%.
But I wouldn’t stop there.
You’ve heard the story of hedge fund managers paying lower rates of tax than their cleaners. This is because hedge fund managers earn their money when they sell shares in companies. They pay capital gains tax at just 20%, not higher rate income tax of 40 or 45%.
Someone who earns £100,000 in salary as an employee will pay income tax and national insurance totalling £34,220.
Whereas someone who earns £100,000 from selling shares pays half as much, £14,390 in capital gains tax.
And if you earn the same £100,000 from dividends, you’d pay £18,762 in dividend tax.
Wealthy people tend to earn a mixture of dividends and capital gains and thus pay half as much tax as conventional employees.
I say: whatever money you make, from whatever source, in whichever manner… it all goes into one pot, with one personal deductible allowance of say £12,000.
No other deductions, no loopholes, no clever little tricks from your accountant. Add it all up, deduct £12,000 and pay 32% on everything.
The people who lose out are those earning dividends and capital gains, who have been paying much less than the rest of us for a very long time.
Partly for that reason, I don’t think there’s a need for higher tax bands. 32% is a simple flat tax. Everyone pays the same rate. So, there’s no incentive to try to find loopholes. This should reduce legal tax avoidance and illegal tax evasion.
Some people will argue this idea raises tax on investment. It would hurt entrepreneurs who are the engines of the economy. Rubbish. I’ve been an entrepreneur. You do it to make money. Once you’ve made that money, why should the tax you pay be half as much as everybody else? £1000 earned by an entrepreneur or an investor is no different to £1,000 earned by a cleaner. Both should pay the same rate.
You could write this tax code on a single sheet of A4.
A 10-year old child could complete your tax return. That’s bad news for lawyers and accountants… but nobody like them anyway.
I’m Leon Hawthorne. Thanks for watching.