“The art of taxation,” observed John-Baptiste Colbert, Treasurer to King Louis XIV in France, “consists in so plucking the goose as to obtain the largest number of feathers with the least possible amount of hissing.”
The recent bout of moral outrage regarding the tax affairs of Jimmy Carr and other celebrities has resulted in a great deal of hissing for very few feathers. Colbert would not have approved.
The question is – at whom should we be hissing? Are the real villains of the piece the celebrities using legitimate means open to them to minimise their tax payments, or the system that allows them to do so? In the lead front-page article in today’s Times, Sir Terry Leahy, former chief executive of Tesco, is quoted as saying that, “if taxpayers are unhappy with the law, then the answer is to change the law.” The same article reports that HMRC is now so overwhelmed with tax disputes and tribunals that it would take 38 years to clear the backlog at the present rate.
The truth is that the real problem lies with the immensely complex system of reliefs, allowances and special provisions inherent within the current UK taxation regime. This provides a bonanza for tax lawyers and accountants – whose undoubted talents would be far better deployed on more productive enterprise – while generating distortions that undermine the productivity of the British economy.
What is required is a radical and comprehensive overhaul of the current taxation system. An alternative system, raising the same amount of revenues, could be based on a simple 20:20:20 structure – setting the basic rate of VAT, income tax and corporation tax all at 20% – while doing away with the plethora of reliefs, allowances, and special payments that have built up over the years. Within this system, the basic Old Age Pension would be increased, and the personal tax allowance set at £10,000 – so the first £10,000 on anyone’s income would be tax free. Around the core 20:20:20 system, I would propose two layers. A higher rate of income tax of 40% would apply for those earning above a certain threshold. And a reduced rate of VAT of 5% would apply to labour-intensive services such as hairdressing and out-of-home meals.
Incidentally, following my May 31st comment on the Pasty Tax and the VAT rate on food, provisional estimates have been made of the total fiscal impact of applying a standard 5% VAT rate to all processed and prepared food. These estimates indicate that it could generate a modest increase in VAT receipts for the Exchequer. This is on the basis that net grocery sales are currently running at approximately £160 billion a year – the UK being the only EU Member State apart from Ireland that does not charge VAT on groceries, under the “temporary” concession of 1975. Under my proposals, fresh food would still be free of VAT, whereas prepared food would accrue a 5% rate. A first-order estimate is that prepared and processed food accounts for a quarter of all food sold in supermarkets, bakeries and other shops. On this estimate, extending a 5% VAT rate to all prepared food would generate a net receipt of approximately £2 billion for the Exchequer (= £160 billion x 25% x 5%).
The central point is that a simplified tax structure need not cost money. It would broaden the scope of the taxation base, make tax avoidance more difficult, eliminate the distortions and inefficiencies inherent in the current system, and be regarded as fairer by those to whom it applies (i.e. you and me). Indeed, over time, the dynamic stimulus that a fairer and more efficient fiscal regime would give to productivity would stimulate growth and increase the UK’s taxation base.