WHY WE NEED TO MAKE TAX SIMPLE – AND HERE’S HOW
A personal view by Derek Bates S
ociety cannot function without effective tax collection and one of the reasons we have
stability in UK is that, in general, we pay our taxes. But the process by which our tax is collected is very inefficient and our complex and expensive taxation machinery needs reform. Any alternative needs to be cheap to run and be capable of reducing the army of tax inspectors and collectors we have now. To do this we need to consider the sources of the tax these people collect. Ibn Khaldun the 14th century Muslim philosopher, Maynard Keynes and Professor Arthur Laffer developed what is now known as the Laffer Curve which demonstrates that reducing the level of taxation actually increases revenue and vice versa. Although the Laffer Curve is denigrated by many economists as being too simplistic, there are many examples where it has been shown to work as predicted. Chancellor George Osborne increased Capital Gains Tax from 18% where it brought in £7.8bn revenue to 28% where in 2011-12 it collected only £4.3bn and in 2012-13 it collected only £3.9bn. Similarly, the considerable increase in stamp duty for house purchases has caused a significant drop in property sales particularly in London and has resulted in greatly reduced return to the Revenue. Conversely, the reduction in tax
payable by film makers has resulted in a large increase in films made in UK and generates almost £12.50 for the UK economy for every £1 of tax relief. Britain’s £1billion film industry as headlined in the Daily Mail, ‘How Osborne’s tax break has got Hollywood’s finest flocking to the UK’.
Spending on film production in the UK soared by 14% in 2013
Tax breaks claimed by movie makers from the Treasury totalled £202million
Supported films included Maleficent and Jack Ryan: Shadow Recruit
Disney announces it is to shoot Alice in Wonderland sequel in the UK
28 DIRECTOR OF FINANCE
John Maynard Keynes, the economist, in 1945
Efficiency of taxation can be measured as a ‘Cost over Value Ratio’ (COVR). As an ideal, a tax should cost nothing to collect. If people were totally honest (only an idealist would be naive enough to think they are) and calculated their tax correctly, sending it to the Revenue through the post at their own cost, that would represent an ideal and COVR could be calculated as roughly 100%. With the human character as it is, no one will want to pay an avoidable tax and many conceal income and wealth in a variety of schemes. We therefore have to have an army of tax inspectors with powers which, in a democracy, we find alarming. In the name of tax collection, it is considered acceptable that VAT and Inland Revenue inspectors adopt the methods of the KGB, invade premises and drag people from their beds in the early hours of the morning. The cost of all these inspectors, assessors, clerical officers, buildings, reams of paper is enormous with the administrative budget for HMRC in excess of £4bn.
‘ With the human character as it is, no one will want to pay an avoidable tax and many conceal income and wealth in a variety of schemes’
Even if we avoid buying anything and
instead of owning a house, live in a tent in a forest to avoid rates and put our money into bank accounts, we will pay tax on the interest and when the grim reaper comes, a huge chunk of any capital we have saved goes to pay inheritance tax. The economy of Britain is dominated by house prices. Until the 2007 credit crunch, the conventional mechanism by which governments attempted to control house price inflation was to increase or decrease the bank rate. Increasing the bank rate to reduce inflation is a blunt-nosed tool because it can take up to 18 months to be effective and, in itself, increases the cost of borrowing, which adds to inflation. It also increases the currency exchange rate relative to that of other nations and pushes up the costs of exporters so that they are unable to sell their products. The result is that manufacturers go out of business and the economy tends to spiral downwards. We therefore need a more sophisticated means of controlling house prices.
R
ecognising that the UK tax system is appallingly complex and grows in complexity each
year, and thereby retards the economy. Are there any other successful regimes which are simpler and have used tax as a stimulation to economic growth? Consider taxation in Hong Kong. The
process was introduced by Sir John Cowperthwaite, the colony’s financial secretary. His innovative tax regimes were so effective that they are credited with transforming Hong Kong from one of the poorest nations to one of the most affluent and successful. He had almost complete control of the Hong Kong government finances and adopted a policy of positive non-intervention, following the laissez faire, minimum government principles of the Manchester Free Traders. He refused to collect and distribute economic statistics, saying that if he did, they would be misused by the government of Hong Kong. During his 10 years in office, wages rose
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