As a simplification campaigner, my Budget manifesto is broadly as follows:
a) Cut out £100 bn of waste from government spending.
b) Scrap the two worst taxes of all - VAT and Employer's NI - dynamic cost of this, no more than £60 billion. This leaves us around £40 billion net saving, meaning that PSBR will be more or less nil.
c) Get rid of as many in-work-benefits and income tax breaks (esp. tax relief for pensions contributions*) as possible and replace it with a flat rate income tax of 30% or so (comfortably on the upward slope of the Laffer Curve) and a personal allowance of £10,000. The dynamic cost of this would be minimal - perhaps 35% is closer to fiscally neutral?
d) Replace Council Tax, Business Rates, Stamp Duty Land Tax, Inheritance tax, TV licence fee etc. with a flat rate Land Value Tax (or Property Value Tax) on all land and buildings. A fiscally neutral rate would be about 1.2% per annum of total property values at today's values. This will go up to about 2%, assuming that values fall by 30%. If nothing else, this will keep property prices low and stable, as it will act like a higher interest rate (like in the 1950s and 1960s, when we had Schedule A taxation and Domestic Rates).
This has to be one package. I am aware that altho' people pay lip service to the benefits of simplification, there are huge vested interest in preserving the status quo:
The Lefties scream blue murder when you suggest getting rid of their beloved jealousy surcharges (higher rate tax and Inheritance Tax). The interventionists will cry foul if the tax system no longer 'encourages people to save' (rather than just enabling them to save, by leaving them higher post-tax incomes in the first place). The 'asset rich, cash poor' will whine about 'ability to pay' the LVT or PVT, which is a red herring - pensioners will be allowed to roll up unpaid tax to be repaid on death (which is yet another reason for getting rid of IHT - or else it clearly would be double taxation). The public sector unions will be horrified to learn that hundreds of thousands of bureaucrats will be made redundant. And so on.
Under my system, it will be a straight fight between people with high incomes relative to the value of property they own (in particular, tenants) and the 'asset rich, cash poor'. But seeing as income tax payers are paying for old age pensions in the first place, I think that the balance would be about right.
* As a quid pro quo, pensions paid out of funds that had not received tax relief on the way in would of course not be taxed on the way out.
Crowds and Warnings
1 hour ago
16 comments:
I would definitely put cutting of corporation taxto 12.5% at the top of the list. This is what Ireland did & the rusult has been 18 years of 7& growth. This tax is purely on wealth creation & hits the most efficient & productive businesses hardest. I would also like to cut business rates, particularly for smaller companies, which is where inovation comes from.
Business may not have votes, which is why they are easy to tax but each £ taken from them is not only 1 less for investment but a disincentive to invest in the UK.
The unions will fight tooth and nail to keep wasteful unnecessary bureaucracy in the system, and I’m not any government would have the stomach to slug it out with them unless the unions drastically overplay their hand (although there is some indication that they could do that in the next 12 months).
Neil, the most damaging taxes on business/production are VAT and Employer's NIC (that between them raise nearly three times as much as corporation tax). The Irish 'miracle' was a scam*, which is now falling apart most gloriously.
Business rates is akin to LVT and is hence the least bad tax. It reduces returns to landowners but not to business. Successive UK governments have experimented with business-rate free zones and all that happened was that landlords put up rents.
* It became, effectively, a tax haven, which is fine for a country of 4 million - they lost half their domestic corporation tax receipts but gained more than that from captive finance and insurance subsidiaries etc. This works fine for small countries, but not the UK that is 15 times bigger - there simply aren't that many captive finance and insurance subsidiaries to go round.
MJW, an MW-led gummint would put Thatcher into the pale.
A flat tax seems to work well in many countries. The rate in Estonia is now down to 20% and falling. My sons live in Ireland where the rate is 22%. They are quite satisfied with that.
Anon, Estonia, like many Eastern European countries are pulling a fast one. Corporation/income tax is at very low rates but payroll taxes are enormous, like 40% or something.
Ireland I have mentioned before, it is all well and good paying 22% income tax, but they have a much higher rate of VAT than we do, which funnels investment into housing (VAT zero rated) and has contributed to the bubble that is now bursting nicely to devastating effect.
But old codgers already have a personal allowance of nearly £10000 so, for many of them, you are promising an increase in their income tax bill of 50%. Cheer they will not.
D, the State Pension, age-related means tested crap like Pensions Credit and public sector pensions will be rolled into a flat rate Citizen's Pension of about £125 a week per pensioner. And private pension income will be taxed at a lower rate like 20%. And pensioners will also benefit from getting rid of VAT etc.
I like VAT as it's one of the few taxes that those on benefit have to pay!
I pretty much agree. Citizens' Income, flat tax, no employers' NI, no VAT. How would you handle housing benefit and the council house subsidy?
That's daft snafu.
Longer term, you should think about
1) Intellectual Property VT
2) Citizens dividend from LVT & IPVT
3) Raise zero rated income to infinity.
4) Cut Business taxation to zero.
5) Cut IHT to zero
Basically tax rent seeking, and don't tax transfers.
I'd also get rid of compulsory purchase laws and go for market geonomics, but that's me!
Snafu, you have fallen for the Big Fat Lie that VAT is borne by the consumer, it is not - it is tantamount to a turnover tax, i.e. it is borne by the producer.
Marksany, my thoughts on housing subsidies are here.
AC1, exactly! Tax 'rent seeking' first.
Agreed, Mark. Not sure about taxing pensions at a different rate, I tend to think all income should be taxed equally, regardless of source. Also I hope when your LVT swallows up the TV licence fee that the MW government also scraps the need for it. I've had it with subsidising the unnecessary.
Under your scheme, I'd keep a lot more of the money I earned but pay more LVT than I presently do Council Tax.
I don't think it would be as hard to win people over as you think. I explained the concept of a negative income tax (flat tax rate, flat CBI) to my leftie mates and they really went for it. It's a redistributionist idea so that appeals to the left but it's bare bones so that appeals to the right.
PT, pensions is a complete fudge, if you look at all the pluses and minuses and ins and outs, taxing private pension income (derived from tax-favoured schemes) at a lower rate is the only fair compromise
Mark, your proposals look very good, though I'm sure people will want to see more detail in section a.
The 'asset rich, cash poor' will whine about 'ability to pay' the LVT or PVT, which is a red herring - pensioners will be allowed to roll up unpaid tax to be repaid on death
I appreciate the political rational for doing this, but I would prefer this was not implemented, for the following reasons:
1. Fairness - waiting for these pensioners to die means that other taxpayers have to pay more now.
2. Complexity - will this apply to all pensioners? Or will we have different limits on the size of land assets and the income to qualify? Only for their main residence or for all property?
3. Risk - 2% over perhaps 30-40 years is a very significant share of the total value of the asset, assuming house prices do not grow rapidly (which I hope will be a benefit of moving to LVT). What if property prices crash just before the person dies? Where does HMRC stand in the queue if there are other debts? And this is before we consider what interest rate should be charged on the deferred tax. RPI? Base rate? More?
4. Economic efficiency - why would a pensioner want to remain asset rich and income poor? The whole point of retirement planning is to build up assets during one's working lifetime to provide income in retirement.
Better everyone pays their taxes now, and let the private sector handle any individual problems, e.g. through equity release. Our charitable efforts (private or state) would be better focused upon the deserving members of the "asset poor, income poor".
Ed, this is largely political rationale.
I accept that there are details to be worked out, but I do not accept your point 3.
Assuming it's a PVT of 2% (to keep maths simple) and values rise in line with inflation plus real earnings growth (say 2% plus 3%), then the rolled up tax would capture about 40% of the nominal gain during retirement (which does not seem unfair to me - like I said, it's sort of a replacement for IHT).
MW
In principle, who could disagree with you? Unfortunately none of the parties - or any other part of the political class - which run our much vaunted "democracy" have any intention of either adopting your policies or even making an attempt at a low tax economy were the present array of taxes left in place. (Forget about Cleggie and the LibDems suggesting tax "cuts": £20 billion in, what, £500-600 billion is lost in the rounding).
BTW Ireland benefitted massively (until recently) from a shift of resources (from memory about £1.8 billion annually) from the UK taxpayer via Brussels. So, as you say, the "low tax" paradise of Ireland was always a myth and is at an end (hence I suppose, in part, the "No" vote on the Lisbon Treaty). Even Bono has moved his activities out of his homeland to the more welcoming shores of the Netherlands.
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