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Britain’s tax code is among the most complex in the world

My recent Times column on tax simplification:


Can we try tax simplification, please?

Though I applaud the motive, I am not sure I fully understand George Osborne’s plan to cut inheritance tax. I gather that if you hand your family home to your children (or grandchildren?) you will get an extra credit against inheritance tax when you die, but that if that home is worth more than £2.35m, you won’t. But that leaves a lot of questions. What counts as a family home? What happens if you vary a will like the Miliband family? And so on.

We will have to wait for the small print in the finance bill after Wednesday’s budget, and even then will need tax accountants to explain it. And that’s my problem with the proposal. It’s a further complication of the already horrendously complicated tax system. There are 89 different tax breaks from inheritance tax alone. Our complete tax code, at 21,000 pages and ten million words, may now be the fattest in the world (Hong Kong gets by with 300 pages), and is ten times longer than the Bible.

In 2010 Mr Osborne called Britain’s tax system “one of the most complex and opaque tax codes” on earth and promised radical simplification. He even set up the Office of Tax Simplification. Yet he has not been a simplifying chancellor. For partly understandable reasons – cohabiting with Liberal Democrats, the need to pluck every feather of revenue from the taxpayer goose, and his bad experience with the simplification of the pasty tax – the tax code has only grown more complex.

As for the Office of Tax Simplification, we have barely heard from it. Some even doubt it still exists. Its boldest suggestion, that national insurance be merged with income tax, has been ignored. With six employees against HM Revenue and Customs’ 64,000, it was never more than a gesture.

Andrew Tyrie MP, chairman of the Treasury Select Committee, in an interview withThe Times last week, called for the OTS to be given independence and put on a statutory footing similar to that of the Office for Budget Responsibility: it should then give Parliament an annual report on the complexity of tax.

A complex tax code plays into the hands of the rich, creates overemployment among expensive tax accountants and distorts incentives. It becomes uncool to pay tax rather than find ways round it. Look no further than Greece for what happens to an economy when the better-off avoid paying taxes. In Greece, lawyers, doctors and accountants spend more, on average, than their reported income to service debt on consumer loans: not because they have especially big loans, but because they hugely under-report income.

Across the Atlantic, at least one presidential candidate gets the point that simplification is the least damaging way of taxing the rich. Senator Rand Paul, the libertarian Republican, wants to “blow up our terrible tax code and start over”. He would abolish duties and tariffs, all gift and estate (inheritance) tax, all employee payroll taxes, and almost all tax breaks, except on mortgage interest and charitable donations. Tax credits for the low paid and child tax credits would also stay. He would levy one flat income tax of 14.5 per cent on all income, personal and corporate, with a $50,000 exemption per family of four.

He calculates that a radically simpler tax system would boost growth and hit the rich. He would “end corporate welfare and eliminate the army of lobbyists and tax lawyers gaming the system”.

The Tax Reform Commission, set up by George Osborne as shadow chancellor in 2006 and chaired by Lord Forsyth of Drumlean, pointed out that taxes had become not just more complex but more unstable – changes are more frequent, making planning harder. In 2012, the 2020 Tax Commission, chaired by Allister Heath (and to which I contributed), recommended abolishing eight taxes and folding all income tax, national insurance, capital gains tax, transaction taxes and corporation tax into a single income tax with a 30 per cent maximum rate and a £10,000 exemption: not unlike Senator Paul’s suggestion. Both have been ignored.

You can see why. Simplifying tax is politically risky, because it inevitably creates losers among special interests, who tend to make disproportionately more noise than the dispersed winners. That’s why it is usually only possible when revenues are booming, so the closing of loopholes can be offset by the lowering of rates. Hence now is the time to begin to think about it. As the economy recovers, says Stephen Herring of the Institute of Directors, “both business and individual taxpayers will rightly expect more wide ranging tax reforms and simplification than the previous government was able or willing to undertake”.

Nigel Lawson made it his policy to abolish one tax in each budget and did so six times, while cutting income tax and reducing it to two bands. He was the last chancellor to achieve simplification. The Brown years were a missed opportunity as revenue boomed but so did tax complexity. During this century, Tolley’s tax guide, the bible of tax accountants, has more than trebled in length for corporate tax and capital gains tax, and roughly doubled in length for income tax.

So when Mr Osborne stands up to deliver his budget it would be refreshing if he could catch just a little of Rand Paul’s tax radicalism, just as his colleague Iain Duncan Smith is bringing radical simplification to welfare. He should announce an ambition over the next five years to close as many reliefs as he can, while cutting rates of tax to compensate.

The Institute of Directors has a helpful menu for him. He could merge inheritance tax and capital gains tax, align reliefs for various investment schemes, and perhaps give small businesses the option to be taxed like an individual or a partnership, rather than a corporation. Simpler taxes mean a less blurred line between legitimate tax planning and aggressive tax evasion.

In the case of inheritance tax, Adam Memon at the Centre for Policy Studies suggests he abolish agricultural and business property relief and halve the rate from 40 per cent to 20 per cent. That would hurt some landowners (including me) but help most households far more simply than his present scheme.

By Matt Ridley | Tagged:  rational-optimist  the-times