Sometimes it’s the little things that matter in tax systems

A little story that helps to explain why the Greek economy is in the depths that it is:

But as happens so often in Greece, the bureaucrats had other plans. In a country where you are viewed favorably when you spend money but are considered a criminal when you make it, starting a business is a nightmare. The demands are outrageous, and include a requirement that the business pay taxes in advance equal to 50 percent of estimated profit in the first two years. And the taxes are collected even if the business suffers a loss.

I recall something similar from time in California: you must put up a bond for the amount of sales tax that you will be collecting in the future. Plus a fee for the privilege of opening a business in that great state.

This just isn’t a sensible manner in which to be running a tax system. Yes, of course, tax must be collected for there are things that we really do need government to do (even if not as many as they attempt to do). And it’s probably a good idea to have certain measures in the tax law to make sure that people don’t dodge said righteously due taxes. But to add to the capital requirements for starting a business in this manner is simply ludicrous. It’s a difficult enough, and expensive enough, enterprise at the best of times. Rather better, therefore, to leave the possibility of avoidance there in the process of leaving some room for a business to even start.

Our own dear HMRC seems to have cottoned on to this point: it’s no secret at all that many new firms bolster working capital by delaying PAYE tax payments to the Treasury. It’s not exactly desirable in the scheme of things but when looked at in the round better that such companies survive their growth pangs than that HMG gets its money on the nail.

Of course we should have a more progressive tax system

The Guardian is getting very het up about the fact that we don’t seem to have a very progressive tax system:

These last two charts suggest that while redistribution of income does happen, it’s mainly due to receipt of benefits by the poor instead of progressive taxation.

There’s a reason why we don’t have a more progressive system too. Which is that there’s a limit to how much you can tax incomes and capital returns before you manage to completely cease all economic growth (or, in the extreme, all economic activity). Which means that if you then still want to stuff ever more gelt and pilf into the maw of the State then you’ve got to tax consumption, sins and other things, those consumption taxes inevitably being regressive taxes.

And we’re around and about at those limits of income and capital taxation. The Treasury certainly believes we are: they’ve said that income tax at 45% (plus employers’ NI etc) is the peak of the Laffer Curve, capital gains tax at 28% is similarly at that peak.

At which point we find that we thoroughly agree with The Guardian: we too believe that the UK tax system should be made more progressive. And given that we cannot increase taxes on incomes any further and that consumption taxes are regressive, this means that the only way to do so is to reduce the income taxes on the poor. So, as we’ve said around here before, the personal allowance for both income tax and NI (yes, employees’ and employers’) should be raised to, at the very minimum, the equivalent of the full time full year minimum wage. Or around £12,500 at present.

This would make The Guardian happy as it would make the tax system more progressive. It would also mean having to shrink the size of the State which would make us doubly happy. What’s not to like?

Well of course we should reform inheritance tax

Another report into inheritance tax and another observation that it doesn’t actually do what it says upon the tin:

People with estates worth many millions are able to avoid the brunt of inheritance tax through complex schemes, including moving the cash offshore or investing in agricultural land and small business shares. Those avenues are closed to “moderately well–off” people whose only assets are their home and pension, Mr Johnson said.

It’s just about possible to see that the great plutocratic fortunes should be broken up every generation or so to prevent the fossilisation of society: if that’s something you tend to worry about which we don’t very much. But to have a taxation system which attempts to do this and then doesn’t is obviously entirely dysfunctional.

Our current system manages to tax the small capital of the bourgeois while leaving those plutocrats untouched. We therefore really rather do want to change that taxation system.

This is not, I hasten to add, the official ASI line here, rather being a personal musing. But I take it as a given that we don’t actually want to tax the petit and haute bourgeois accumulations of capital. Far from it, we’d much prefer to see modest estates cascade down the generations. For reasonable amounts do provide freedom and liberty. In that currently fashionable phrase, enough to do anything but not enough to do nothing. It’s also, even if you do worry about the plutocrats, not how much money is left that is the problem but how much money is received. Someone leaving a few billions to be spread among thousands is very different from a few hundreds of millions being left to just one.

So I would muse that we might want to move to a system something like the following. It is the receipt of an inheritance which is taxable, not the leaving of one. Further, there’s a substantial lifetime exemption from having to pay tax on receiving one or many. Several millions perhaps: that need to still do something amount.

Alternatively, of course, we could just move the entire taxation system over to being a consumption tax. In that manner we don’t actually mind who has what amount of capital nor where it came from. We just tax people when they spend with the capital or the income from it. and given that that’s the general trhust of the Mirrlees Report there’s good academic backing for the plan.

Seven things we’d like to see in Budget 2014 (but probably won’t)

Here are seven things we’d like to see at this year’s budget:

1. Personal allowance and employee National Insurance thresholds should be merged and set at the NMW level (approx. £13,000/year after the NMW is raised to £6.50/hour). The government should legislate to keep the tax & NI thresholds at at least at the NMW level. It is crucial that the National Insurance contributions threshold be raised as well as the income tax threshold.

2. The corporation tax cut planned for 2015 should be brought forward by a year (to 20% this year), with a commitment reduce it further by 2.5% per annum for the next three years to 12.5%. In the long-run it should be abolished altogether as it is a stealth tax on income (workers’ wages bear approximately 60% of the tax) and a distortionary tax on capital.

3. The Chancellor should go forward with plans to merge Income Tax and National Insurance. Employers’ National Insurance Contributions should be included on workers’ wage slips to highlight that this is a stealth tax on wages.

4. Help to Buy should be wound down ahead of schedule to reduce house prices in London and the South East. To create jobs and encourage construction the Chancellor should endorse radical planning reform that would allow more houses to be built.

5. Subsidies (“financial relief”) to energy intensive industries should be ended with the money saved paying for a broad reduction in green energy taxes to reduce consumers’ energy bills.

6. The ring-fence of NHS spending should be abolished. If savings can be made in the education, policing and welfare budgets, they can be made in the healthcare budget as well.

7. The Bank of England’s mandate should be revised, with the Bank instructed to target the level of nominal spending (nominal GDP) in the economy along a predetermined trend. This would reduce inflation in boom periods and prevent deep recessions by stabilising aggregate demand.

Tax Freedom Day has finally arrived

Tax Freedom Day—the day when the average UK resident finishes paying George Osborne and begins putting money in her own pocket—is finally upon us.

After 150 days of sending all our money to the Treasury, we can earn for ourselves over the rest of the year.

The ASI’s Director, Dr Eamonn Butler, says “Tax Freedom Day, which the Adam Smith Institute has been calculating for 25 years, is the plainest way to show what the tax burden really is. That is why the Treasury hates it. They of course want to conceal how much tax we pay, which is why they are so keen on stealth taxes.”

“But we put in every tax, including stealth taxes – income tax, national insurance, council tax, excise duties, air passenger taxes, fuel and vehicle taxes and all the rest – and show just how long the average person has to work to pay their share of them all. The stark truth is that this burden costs us all 150 days of hard labour every year. That’s not how long a rich person has to work – it is the time the average person must labour for the tax collectors.”

“In the Middle Ages a serf only had to work four months of the year for the feudal landlord, whereas in modern Britain people have to toil five months for Osborne’s tax gatherers.”

“An increasing number of economists believe that Britain’s taxes are too high and are choking off recovery. Some politicians say they need to keep taxes high in order to balance the government’s books. But the trouble with governments is that they always spend everything they raise in tax – and then as much more as they can get away with through borrowing. Just as the rest of us have had to cut back, so should the government. The UK economy would be a lot healthier for it.”

Steve Baker, Conservative MP and member of the executive of the 1922 committee, adds: “Many congratulations to the Adam Smith Institute for once again revealing the shocking truth about taxes and overspending. This doomsday machine of deficit spending, debt and currency debasement will eventually blow up and there is no kindness in pretending otherwise. Politicians who are serious about the prosperity of our country and the wellbeing of the poorest within it should take note.”

For more information see our press release or our Tax Freedom Day page.

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