Tax Simplification

Mark Siara - Fri 16 May, 2008

Gordon Brown has presided over an intricate tax system whilst turning the UK into Western Europe’s first banana republic.

The Abbey National’s recent ad campaign highlights its own range of simple to understand products “because life’s complicated enough”. At last the advertising world has realised what the rest of us have known for some time: life ain’t simple. Interestingly the website www.anagramgenius.com has rearranged the phrase ' Abbey National - because life's complicated enough' into ‘So, a big idea: Cheap finance, money, etc? Absolute bull!’ Spooky, eh? But I digress.

We all know people who lead extraordinarily busy and complicated lives. For example, the Engineering Consultant who has an additional part-time writing job, is doing a Screenwriting MA and currently has a radio script with a development producer at the BBC. This person also has a young family and therefore all the responsibilities that entails. Then there’s the single mother, trying to bring up her child whilst holding down a full time job while pursuing the absent father for unpaid maintenance. All that and trying to refinance to avoid defaulting. Or how about the woman who was trying to complete the delayed purchase of her house whilst on holiday in Canada? I know each and every one of these people and I’m confident the erstwhile Daily Reckoning readers can provide even more outlandish examples.

Surely this is a theme for our times - Britain in the noughties is a frantic place to live. It’s not always been the case though. I certainly don’t remember my parents running around like headless chickens at the weekend. Don’t misunderstand me, they worked hard, but the evenings and weekends were their times; times to relax and do what they enjoyed – odd jobs and emergency repairs aside. Of course this could all be a rose-tinted look at the past. Maybe the reason that they didn’t do stuff or buy stuff was down to lack of (cheap) money or opportunity. Or maybe it was their choice and they didn’t feel the need to compete in the same way that people seem to today: the newest car, the most expensive holiday, the refitted kitchen.

If the citizens of “This royal throne of kings , this hectic isle” (to misquote Shakespeare’s Richard II) have made their own lives convoluted, they know they can rely on the government – to make a complex situation more tortuous. All governments have done this but the current incumbent in No.10 has turned tinkering into an art form (one of those modern pieces that nobody understands, no-one actually likes and is destined to hang on the wall of a corporate toilet somewhere). So let’s concentrate on Mr Gordon Brown - Britain’s version of Hugo Chavez – and a series of policies and initiatives so complex it would take a team of Mensa qualified scientists and a supercomputer to unravel them.

Take income tax and the associated slew of benefits and credits that accompany it, a veritable Rubik's cube of legislation and confusion. Trying to navigate through this tax and credit’s maze brings to mind Winston Churchill’s comment about Russia "a riddle, wrapped in a mystery, inside an enigma". It appears to be so convoluted that even the ex-Chancellor himself finds it difficult to understand, or why else would he have scrapped the 10p tax band and disadvantaged thousands of core Labour voters? It’s either ignorance or lack of political guile, neither an attractive quality in the country’s leader.

So what can be done about this? Well how about this slightly radical proposal. Scrap family tax credit, child tax credit, child benefit and reform the income tax bands, national insurance (a tax by any other name) and the level of personal allowance. Replace this mash-mash with an increased personal allowance and a single tax band. Say a £10,000 personal allowance for all citizens (including pensioners) and a tax band of around 40% (which includes a portion of NI). Simple and straightforward. The minutiae do need working out (which is right up Gordon’s street) and the actual levels would be adjusted so that the most vulnerable would not be disadvantaged. With significant savings on administration, more funds could be released to the populace and the net cost to the Exchequer could be maintained. The side advantage of this proposal is that it would encourage more people back into the workplace and reduce their dependence on benefits.

It’s a similar story with Council Tax. Bandings, inspections, appeals, rebanding, it’s all a bit of a kerfuffle. Something simpler can surely be devised. I’m not suggesting the return of window tax but what about a local income tax? You could use the same data collected for the national income tax and let each council decide its own level of local taxation. It could be collected at source, reducing the cost. Easy.

Then there’s Vehicle Excise Duty and the other ‘environmental’ car taxes, including a recent proposal to backdate tax on high-polluting cars. It’s unnecessarily complicated. Instead include the VED in fuel duty. Those that use the roads most and have the highest polluting vehicles would then pay the most. It’s simpler and cheaper to collect (at source) and it doesn’t need policing to check who has actually paid for it. Of course if the main aim of vehicle taxation is not environmental, these proposals would make less sense. Ah, now I see.

What about the Bank of England and the monthly machinations over the interest rate. Why not let the markets decide the cost of money instead of a committee. Why feel the need to target the inflation nut with the sledgehammer of interest rate manipulation? Let the market decide and perhaps avoid the recent asset bubbles in stocks and housing. It’s free of political interference too.

Scrapping house purchase stamp duty would also be an improvement, removing all that price bunching at the thresholds. Instead replace it with a single tax to be applied on top of the interest rate. This would reduce the upfront cost of buying a house but increases the monthly cost. Again this could be done with no net change to the Treasury. This rate could be raised and lowered as required (if the money garnered has been ring-fenced you could even send the rate negative in dire times) to smooth out the house price cycle. This has the positive effect of divorcing the cost of owning a property from the rest of the economy and doesn’t impact manufacturing in the process.

It’s almost as if the more complicated taxation becomes and the less the public understands it, the more Gordon thinks he can get away with. But why does he feel the need to? Probably because Brown needs to prop up the ailing UK balance sheet any way he can. In the past it would have been through company profits and by selling goods overseas. However, nowadays we are so reliant on the crippled financial sector that we are like the old South American one-trick economies. Gordon Brown has presided over an increasingly convoluted and intricate tax system whilst turning the UK into Western Europe’s first banana republic. I propose a suitable name for our leader: El Complicato.