Much ado about nothing

From yesterday's FT:

The legal move marks the opening salvo of the Revenue’s effort to extend its crackdown on evasion to all the 500 foreign banks and building societies with a UK presence. It expects to raise £500m over the next four years by prompting holders of undisclosed accounts to come forward... The move follows similar legal sweeps in 2006 and 2007, which forced five British high street banks to disclose details of secret offshore accounts. That crackdown, accompanied by the offer of a partial amnesty, recovered about £400m in unpaid taxes at a cost to the exchequer of just £6.5m.

OK, that makes an average take of about £100 million a year, which sounds like a lot but represents about, er, 0.02% of all UK government revenues. I don't condone tax evasion as such, but I find it a bit difficult to get excited about it in absolute terms. To the extent that we have to tax incomes at all, it does seem fairer to make everybody pay the same flat rate, rather than the honest paying a slightly higher rate than would otherwise be necessary, but isn't it more important to have a system that doesn't encourage tax evasion in the first place?
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Step One is to reduce income tax rates as far as possible to reduce the temptation, of course. The above article refers to tax on interest income. This only works if a UK bank pays interest to an offshore subsidiary (and obtains a full tax deduction) and the offshore subsidiary then credits that interest to its UK-based depositors tax-free, so...

Step Two is to have withholding taxes on the interest that banks pay to offshore subsidiaries (and don't forget that this is a requirement for payments to most tax-havens anyway), or even better*, by disallowing interest payments as an allowable expense for UK businesses or banks and making the corresponding interest income (whether paid to a bank, to individuals or to another company) tax-free.

This is exactly what happens when a UK company pays a dividend out of post-tax profits to a basic rate taxpayer or to another UK company - there is no additional income/corporation tax liability on the recipient** because that income has already suffered corporation tax. On Planet Wadsworth, there will be a single flat tax rate on all corporate or personal income, so by definition there will be no higher rate tax on dividend income or a 'marginal' corporation tax rate*** that is any higher than that.

For sure, there will still be people who keep money offshore (for slightly more sinister reasons), but we could go one better and subject that to income tax as well (to the extent we can track it down), so the effective rate on such income would be nearly twice as high as if they had kept it in the UK in the first place.

That's that fixed. Next.
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* Under various double tax treaties and EU rules, the UK can't deduct withholding tax from interest paid to most non-tax haven countries, so it's a question of either re-negotiating hundreds of treaties or just amending UK domestic law. While I'm on the topic, we could also do away with this nonsense that interest on UK gilts is paid gross but still liable to tax at the year end - why not just pay a slightly lower rate and make it tax-free?

** Unless the recipient is entitled to an age-related allowance which is reduced pro rata if the recipient's total income goes above a certain level.

*** With companies, although the dividend itself is tax-free, it can increase the marginal rate of corporation tax from 20% to 30%, slightly more than the large companies' rate of 28%.