Albert Einstein complained taxes were more complicated than physics. Why do politicians make the tax system so complex? Isn’t it time to simplify the UK tax code?
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Forget relativity, “the hardest thing in the world to understand is… tax”. So said Albert Einstein. So, isn’t it time to make them less complex?
Taxes are never popular, but why are they so complicated? The UK tax code is a mammoth library of books, estimated to contain 10 million words. It’s time they were cut down to size?
When the American bank robber Willie Sutton was asked why he robs banks, he replied “because that’s where all the money is”.
That impeccable logic is also true of taxes. Governments impose tax where the money is.
Over the years, taxes have led to riots, even civil war.
So politicians play sleight of hand, so you don’t realise you’re being taxed. They cut tax over here, hoping you don’t see them raise taxes over there. Then they throw in some sweeteners to benefit their party supporters.
All this deception and political cowardice has contributed to the mess that is the current tax code, filled with contradictions and ambiguities. So much so, the government tells us to calculate our own taxes based on broad principles, not on the vague words written in statute.
In 2017-18, the government raised £700 billion in taxes. That’s 34% of GDP.
Income Tax, National Insurance and VAT bring in the lion’s share.
Then Corporation Tax, Council Tax and Business Rates.
Duties on fuel, tobacco, alcohol and motor vehicles are important.
Capital… and other small taxes make up the balance.
At least thirty main taxes, each with numerous sub-categories. All require an army of accountants, lawyers and civil servants to administer.
What if we simplify this picture and raise the same money from fewer, bigger taxes?
You remember the story of Sleeping Beauty. In real life, she would not have been awoken by a princely kiss, it would be a bailiff banging on the door with a summons to pay a hundred years of backdated Council Tax.
I don’t think we should incur taxes while we sleep. We should only tax economic activity, such as spending money and earning money.
We could roll together Income Tax, Employees’ National Insurance, Council Tax and Capital Taxes into a single Personal Tax, applied to all income, including capital gains and dividends. A marginal flat rate of around 35% would bring in the same revenue.
Taxes on business are also a mess. Loopholes allow multinationals to pay little or no Corporation Tax. Employers’ National Insurance is a 13.8% tax on every job, which incentivises companies to replace humans with robots. And Business Rates are a cruel overhead, killing the high street.
Take a look at fashion retailer, Next.
Last year, it had revenues of £4.2 billion.
Profits of £723 million.
Its tax bill included:
Corporation Tax, Business Rates, Employers National Insurance and Net VAT remissions.
Totalling: £418 million.
Which is 10% of the company’s turnover.
So, we could replace all these individual taxes – including VAT – with a single Business Tax, charging 10% of turnover. This rate would make no difference to most businesses, but it would level the playing field with online retailers who exploit the present tax regime.
Other taxes are a myriad of duties on specific products and industries. Most raise relatively little money and should be scrapped. Instead add a percentage point to either the Personal or Business Tax.
Some of the larger duties could be simplified.
Take alcohol. Taxes on alcohol raise £11.6 billion a year.
If I buy a pint of beer, I pay 43p in beer duty.
A glass of wine attracts 74p in Wine Duty.
And a double shot of whisky costs 57p in Spirits Duty.
Why discriminate between different beverages? A flat rate, 2p for every millilitre of pure alcohol would raise the same amount of tax.
Taxes on motor vehicles are another big earner for government.
£6.2 billion from Vehicle Excise Duty.
Motorists also pay £28 billion a year duty on fuel.
Why have two taxes when one will do? Scrap the vehicle duty and increase petrol duty by 24p a litre. The average motorist would pay the same.
Petrol duty is fairer because it’s linked to how much you use your car. It’s not an overhead and it’s collected by retailers, so doesn’t require a massive government bureaucracy to administer.
All these suggestions are calculated to be revenue neutral and remove loopholes and special treatment.
Most of all, they would create the simplest, fairest and most effective tax system in the world.
© Leon Hawthorne 2023 