Sunday 16 September 2007
"The UK tax system is well beyond the point at which complexity itself imposes costs and disincentives", says a new report from the Adam Smith Institute (ASI). At 9,973 pages, the UK's tax code is now the longest in the world and, according to KPMG, its administrative burden costs the UK £5.1bn a year.
The report argues that the Treasury should embark upon a sustained programme of tax simplification. Firstly, this would let people know their liabilities and assent to them – making clear the duties of citizenship and allowing individuals to feel they are partners with, not servants of, government. Secondly, "tax simplification can lead to lower taxes." Lower and simpler taxes stimulate growth by discouraging avoidance and creating greater incentives to industry. "The net effect is that the same revenue, or more, can be raised from a lower overall rate than was taken from the higher rate with its added complexities."
To this end, the report recommends:
· Raising the personal allowance to half the average wage (about £12,000 a year). Only income earned above that level would be taxed. This would end most of the poverty traps of the present welfare system.
· The vastly over-complicated tax credit system should be abolished, and replaced with something much simpler. The innumerable tax exemptions that litter the system should also be scrapped.
· National Insurance should be treated as income tax, and calculated on the same rules and base levels as income tax. The cap on NI payments would be lifted, with top rate income tax payers paying a simple percentage without limit. Ultimately, the separate status of NI should be abolished altogether.
· All income should be taxed on the same basis, whether it comes from earnings, investment dividends, or capital gains.
· The arcane and complicated rules for calculating corporation tax should be overhauled. Business profit should be the basis of tax liability, rendering legions of pen pushers and number crunchers unnecessary.
· Pension contributions should be made from taxed income, with the government matching contributions up to a set level. Growth of the fund should not be taxed, nor should any income subsequently drawn from it.
· The death tax should be abolished.
ASI President Dr Madsen Pirie comments: "There is no doubt that a tax simplification programme would increase the UK's competitiveness and its economic growth. It would create jobs and wealth, as well as easing the burden which complexity imposes. The UK could easily and rapidly become the tax haven of choice."