WE ALL know the moral arguments for taxation: it pays for police, roads, hospitals and other vital services. But there is a moral case against taxation too – and a surprisingly strong one.

First, while most of us would happily make some voluntary contribution to essential services, it is only the threat of prison that makes us stump up taxes at today’s eye-watering levels. Tax is extracted by force – and the use of force is an evil we want to minimise. That puts an awesome responsibility on governments to ensure that every penny they extract through coercion is spent wisely. Waste and bureaucracy are not just a drain on the economy – they are a moral outrage.

Click here to read the full article

Lincolnshire Police Authority is advertising for a Chief Finance Officer, paying a pro rata salary (based on a four-day working week) of £65K-£70K per annum. This is an interesting appointment as the police authority will have a new Police and Crime Commissioner (PCC) in November. The police authority should not be making permanent appointments six months before the PCC elections, however sources tell me it is making sure its people will be there when the PCC arrives, and firing them will, of course, be difficult.

The London Borough of Richmond upon Thames is looking for a Low Carbon Communities Coordinator. Here’s part of the job advert:

The Low Carbon Communities Coordinator will build upon knowledge gained from previous domestic and community energy efficiency pilot projects to implement borough-wide projects to realise carbon emission reductions and reduce fuel poverty. You will have responsibility for inspiring and supporting local groups to set up and raise awareness of new projects via a comprehensive communications programme.

How the council thinks it’s going to reduce fuel poverty is anyone’s guess. Perhaps it should write to the Secretary of State of Energy and Climate Change urging him to abandon the Government’s policies on alternative energy, such as wind turbines, that are responsible for pushing up household fuel bills?

None of us deliberately waste energy. We can’t afford it, and simple measures in council buildings can easily reduce carbon emissions. Taxpayers will see the role of a Low Carbon Communities Coordinator for what it is – a non-job.

It is easy to get tangled up in the theory here, and we talk about a number of philosophical perspectives in the report, but I think the basic intuition is simple: if you earn twice as much, you should pay twice as much; if you earn ten times as much, you should pay ten times as much. What is so unfair about that?

That is how the tax system would work under the 2020 Tax Commission proposals except for a new, higher Personal Allowance so that people can earn enough to cover their basic needs without paying tax. It seems much less likely to produce unfair results than the current system which, with its different bands, produces some inequities that are very hard to justify.

We looked at a few examples in the report. For the sake of simplicity, ignore National Insurance for the minute and just assume an Income Tax with bands of 20 per cent, 40 per cent and 50 per cent at roughly the current thresholds:

• A household with two earners both making £25,000 will pay £7,410 in income tax (£3,705 each). By contrast, a single parent earning £50,000 will pay £9,930 in income tax. The single parent pays 34 per cent more despite having the same household income.
• Someone who earns £30,000 a year but spends £10,000 a year on housing – around the average for a family of two adults with children – will pay £4,705, nearly 25 per cent of their income minus housing costs. By contrast, if someone earns the same amount of money but spends £5,500 on housing – around the average for a one-person non-retired household – income tax will be less than 20 per cent of his income minus housing costs.
• Someone who earns £100,000 a year for ten years, £1,000,000 in total, would pay £299,300 in income tax. By contrast, someone who earned nothing for nine years but then earned £1,000,000 in a single year would pay £471,693 in income tax, well over 50 per cent more despite earning the same amount.

Special allowances can be put in place, and to some extent have been, to correct for those inequities. But the underlying problem is that simple income bands cannot possibly reflect all of the differences in people’s circumstances. There are even more fundamental problems like differences in people’s preferences. Suppose one person chooses to do dull but important work as an actuary and gets paid a fair bit, another prefers to enjoy their life as an artist knowing that it will probably mean earning less. Is one or the other of them really better or worse off?

In the face of all that, the proportionate rate seems like a fair share and much more sensible than the current mess.

The critical thing is that it is a fair share that everyone pays, and is seen to pay. That is why the 2020 Tax Commission recommends a Single Income Tax that will be charged at the same rate on labour and capital income. No more paying through a company and thereby cutting your tax bills, as BBC and Department of Health executives are reported to have done. Writing for the Guardian, union mystic Richard Murphy lazily asserts that our new capital income tax would be “highly avoidable”.

He is wrong. The new tax would, for the first time, apply the same tax rate to share buybacks, carried interest, corporations financed through debt instead of equity and loads of other means by which some people currently minimise their tax bills. It  makes the tax system much simpler but also far more comprehensive. Our report is the first to ever set out a concrete plan to produce a tax system that is neutral between all those streams of income. It is an innovative way to ensure that everyone pays their fair share, no more and no less.

George Osborne called our tax system a “spaghetti bowl” in 2010. He had a point. We have one of the world’s longest tax codes at over 11,500 pages, and this has real consequences for families and businesses in the UK. If someone sat down to design a tax system from scratch, they wouldn’t come up with the one we have now. It exists because of years of tweaking at the edges to raise more revenue from more and more people, and offering breaks to preferred industries.

Click here to read the full article

‘No-one wants to see plastic bags littering the streets of Wales,’ Lee told ITV, ‘but this is like using a sledgehammer to crack a nut. It adds an unacceptable burden on small businesses that are forced to comply with the regulation or risk a hefty fine. The Welsh Government should be encouraging families to reduce their reliance on bags, not punishing them when they don’t.’

‘This is not a tax,’ hit back a Welsh Government spokesman.’No money from the charge will come to the Welsh Government but will instead be passed on to good causes by retailers. The TaxPayers’ Alliance are a Tory front organisation. They speak for no one but themselves.’

But Cardiff traders have a different story to tell. ‘It can cause real problems with security,’ said the manager of a city centre sports shop. ‘One time a customer bought a ball and because he didn’t want it in a bag, he threw it to a friend and one of our assistants thought he was stealing it! Generally, we like out customers to walk around town with our products in our bags—it’s good advertising—this bag tax is nonsense.’ A retailer from Castle Arcade hated the extra level of bureaucracy it added. ‘I can’t put the charge through the till,’ he says,’ because I’ll have to pay tax on it. At the end of the day it’s another job to do, it’s fiddly and tiresome—it’s a pain in the neck.’ Many independent shopkeepers are paying the tax themselves rather that bother customers with it.

On top of that tourists are nonplussed by it, frequently wanting to see their souvenirs wrapped in several bags and not understanding why they have to pay for it. ‘It’s going to turn tourists off,’ says Lee. An Australian tourist told him he’d rather carry an uncovered bottle of wine around Cardiff because he thought it was ridiculous to pay for a bag for it.

Not all supermarkets support the bag tax either. The environmentally friendly Co-operative Group has argued against it in the past, citing evidence that paper bags are more of a pollutant and environmental concern than plastic bags. For a Green defence of the plastic bag see this story, which cites the British government’s environment agency report of 2006 that found that HDPE (high-density polyethylene, the typical lightweight plastic bags) are superior to paper because they require less energy and far less water to make and take up less space in landfill.

On our Action Day, 150 signatures were gathered in just one hour and we could have gone on to raise many more objections to this ill thought out tax.

Nick Pearce fudges the point about the Scandinavian economies by citing tax revenue as a share of national income when, for a whole load of reasons, spending is a much more reliable variable in this instance. Lower taxes can produce better than expected tax revenues, after all, and public sector deficits can also crowd out private investment. The overall tax burden is very important in some ways, but he is just using it to play down a genuine and substantial cut in the total burden on the private economy in this case.

The same goes for his comparison of per capita growth rates between the Nordic countries and the United States since the 1960s, which ignores about a billion other things going on. It is also worth bearing in mind that, if he really wants to emulate economic policy in those countries he will also need to introduce a less progressive tax system. The comparison over time with the UK is just as weak, and appears to have perilously few data points.

The only systematic evidence he cites is from Peter Lindert, who he describes as the “world’s leading authority on the development of welfare states and public services since the 18th century” and quotes as saying – in a 2004 book – that across “countries and over time, the coefficients linking growth to total government size are not negative, even in sophisticated multivariate analysis.”

Peter Lindert is indeed a distinguished man, the 1,494th most influential economist in the world. But plenty of other researchers before and since he published his book have come to different conclusions. In 1997, Robert Barro – the 4th most influential economist in the world if you want to play “my economist’s more important than yours”  - found that a 1 per cent increase in government consumption as a share of national income reduces growth by 0.136 per cent. More recently, Afonso and Furceri at the European Central Bank found that a 1 per cent increase in government spending as a share of national income reduces growth by 0.13 per cent. That is just two examples. You can see the others in Table 3.4 on page 133 of our full report, or in this timeline.

The weight of empirical evidence is clearly on the side of the view that higher spending is associated with lower economic growth and that isn’t some kind of accident. Taxes create deadweight costs because they drive a wedge between the price signals perceived by consumers and those received by producers. That means work that isn’t done, so the level of national income is lower. It also means investments that don’t take place, so technological progress isn’t embodied in new capital equipment and national income doesn’t grow as quickly.

Of course, some public spending will also increase growth. It depends how valuable that spending is though and, as the reports cited above show the overall effect is normally negative. To give a further example, an OECD study in 2003 found that if you count them separately spending increases growth by 0.19 per cent, taxes reduce it by 0.44 per cent for an overall effect of higher taxes and spending on growth of 0.25 per cent less growth for every additional percent of spending in national income.

The lessons of history, and the empirical evidence, clearly support the claim that lower spending and lower taxes will tend to mean higher economic growth.

Of course, not everyone pays full National Insurance and we understand that some people might be worried they’ll end up paying more as a result of the simplification, but actually the report will give groups like savers a much better deal, thanks to changes in other taxes.

For pensioners the critical thing is that taxes affect their income in two ways: first they depress the returns on their savings, then they take a chunk of whatever is left. Pension funds that have seen poor returns in recent years will immediately and dramatically benefit as share prices rise due to the removal of transaction taxes which are gumming up markets, capital gains tax that hits when assets are sold and cuts in corporate taxes which depress share prices. That will mean much better returns for pensioners.

So over the long term pensioners are going to get a better deal than they do now. A reasonable tax rate on an income that better reflects the earnings of the companies their pension is invested in. But that won’t benefit those who, thanks to being on defined benefit pensions or already having reached a certain stage in the process, are getting a fixed payment that isn’t improved by stronger investment returns. As we said in the report, transitional arrangements will be needed in the short term to protect existing savers. Some kind of lower rate for those who have invested and paid under the current system.

The self-employed will also be fine. Not only will small businesses be free of the suffocating task of complying with the current complex rules, under 2011-12 thresholds, any self-employed earners who earn enough to pay tax would pay less tax under our plan. For example, someone earning £25,000 would pay £735 less tax and someone earning £45,000 would pay £863 less.

It is important that we don’t become prisoners of the status quo. Our objective should be a simple and transparent system that gives everyone a better deal and improves the prospects for economic growth. The transitional challenges can be overcome without pensioners today paying more. And over time everyone will then get a much better deal.

Click here for the full report

Click here for the report summary

Click here for the full press release

Click here to read the full report

HMRC has failed to collect tax more efficiently despite inventions such as the first handheld calculator in 1967; the microprocessor in 1971; Microsoft Windows in 1985; and the World Wide Web in the 1990s. Even after all these new time saving inventions the cost of collecting tax has only fallen by two per cent in just over 50 years. 

It cost £1.16 to raise a £100 in tax revenue in 1958, 50 years later it cost £1.14:

The UK’s tax system is far too complicated. It places a huge burden on families and businesses across the UK creating a costly tax bureaucracy. The costs of collecting tax in the UK in 2009 were substantially higher than other OECD nations:

Click here to read the full report

Matthew Sinclair, Director of the TaxPayers’ Alliance, said:
It’s staggering that we haven’t seen any real fall in the official estimate in the cost of collecting tax over half a century. With all the technological innovations in between, it’s hard to believe that HMRC’s work costs just as much as it did before even calculators were invented. The UK’s tax system is broken, and is just as burdensome for the taxman as it is for taxpayers.”

From “Red” Ken Livingstone, the Labour Party candidate for mayor of London, to Mitt Romney, the presumptive Republican nominee for president of the United States, politicians have been getting in trouble over their taxes. With voters struggling to make ends meet and pay their own tax bills, they have never been more sensitive to the charge that relatively well-off politicians aren’t playing by the same rules. Now that the complexity and opacity of the tax system is getting our leaders in trouble themselves, will they finally see the case for serious tax reform?

Click here to read the full article