Tax from scratch
Sometimes in scientific discovery we speak of a theory ‘dying the death of a thousand modifications.’ When each new discovery that appears to refute the theory is met by an ad hoc modification of it, we begin to think that the whole theory might need to be replaced by better one.
It was thought that a mysterious invisible substance called phlogiston was given off when things were heated. When it was found that mercury oxide was heavier than mercury, it was decided that phlogiston must have a negative weight, whatever that means. This ultimately led to the discovery of oxygen.
The UK tax code, with all of its exemptions, qualifications and omissions, is about twelve times as long as the complete works of Shakespeare. Attempts to simplify it are often self-defeating because they add extra so-called simplifications. As with phlogiston, it has so many modifications that it might be time to abandon it. Instead of trying to amend it, we should see what a complete replacement tax code might look like.
We would have a flat-rate income tax with National Insurance merged into it. All earnings, dividends, pensions, and capital gains taxed at one flat rate (say 20%). There would be no allowances, reliefs, or exemptions, except for full expensing for business expansion.
National Insurance would be abolished and folded in, so HMRC would become almost redundant for individuals. NI is already just a second income tax in disguise, so merging it is logical. Everything would be PAYE-style.
This would fit the UK well because: the PAYE infrastructure for income collection is already deeply embedded. A flat rate removes the need for multiple bands, allowances, and separate taxes on dividends and capital gains.
It is politically simpler to implement than consumption-only taxes, and for ordinary people, it is the least disruptive day-to-day: payslips would just show one deduction at one rate.
A drastically simplified UK payslip might look something like this under a flat-rate income tax system with NI and other personal taxes merged in.
Employee: J. Smith
Employer: Acme Ltd
Period: 1–31 October
Item Amount (£)
Gross Pay 3,000.00
Flat-Rate Tax (20%) -600.00
Net Pay 2,400.00
That would be it. No NI, and no separate employee/employer contributions. No tax code, allowances, or bands, just one flat rate on all earnings. No separate capital gains/dividend rules: if income arrives through payroll, bank, or broker, the same flat rate is applied at source. The employer administration would be simple. They would just deduct one percentage and send it to HMRC.
It would apply to all income sources. Bank interest, share dividends and pensions would automatically be taxed at 20% by the payer. For the self-employed there would be a quarterly flat-rate deduction via a one-page return.
Of course, any attempt to introduce such a system would be opposed by all tax accountants and tax lawyers, and by everyone else with a vested interest in upholding the phlogiston theory of tax codes. But if a party were elected on a mandate to change everything, who knows what might happen?
Madsen Pirie