If Danny wants to clamp down on top earner taxes, he should simplify the tax system.

Backbencher September 26, 2012 3
If Danny wants to clamp down on top earner taxes, he should simplify the tax system.

Olly Neville,

At the Liberal Democrat conference in Brighton, Danny Alexander went full guns blazing at top earners who avoid tax. We came up with a plan that could help him out:

At the moment the UK tax code would take the world’s fastest reader over 120 hours to complete. UK tax legislation now stands at 11,000 pages. The individual guides for Income Tax, Corporation Tax and Capital Gains Tax are now longer than the 1,225 page novel, War & Peace, by Leo Tolstoy.

Complicated tax systems benefit no one, not the Government, not the poor and certainly not the economy. While I must point out I oppose taxes on grounds of legitimacy (not to mention on huge cost grounds Feldstein (1999) ‘the deadweight cost of income tax could be as high as $2 for every $1 raised’) I will put this to one side for this article and assume that I have fiscal conservatives, true liberals and libertarian small/no staters on my side when arguing to simplify and cut taxes, I will therefore appeal directly to the big staters, the socialists, and finally to the spend happy people and their vested interests.

Taxes are used to fund Government projects, the Government therefore must want to maximise tax revenue to have as much money to spend on whatever projects it wants, the more tax money the Government has the more likely it is to spend it on what you want, and the less likely it is to cut the bits of the state that you like. If you want the NHS to save more people, the education system to give better quality teaching etc without actually privatising them and making them vastly more efficient (Singapore’s health care or even German /Dutch models in comparison to the NHS, Private schools in comparison to state schools but I digress this is an argument for another day) then you need more money to put into them.

Firstly the obvious argument, as the laffer curve shows cutting taxes raises revenue:

http://www.adamsmith.org/blog/tax-and-economy/the-proof-of-the-laffer-curve-pudding/

http://www.mackinac.org/article.aspx?ID=676

http://www.cato.org/pubs/tbb/tbb-0302-13.pdf

Indeed as the 2nd link shows, tax cuts actually raise the percentage tax take from the rich (even as we speak the 1% pay 25% of all income taxes)

But I am not here to talk about cutting taxes as that is an argument already won, I am talking about simplifying taxes. Despite the overwhelming amount of tax taken from the 1% or even the top 10% (well over 50% of tax revenue, that’s something like £500bn) many still complain about tax avoidance.

Now tax avoidance is legal – however much you may wish it was not – and comes about for two reasons: firstly high taxes, taxes act as a disincentive, that’s why people are so keen on taxing smoking because it adds to the price and by laws of supply and demand which will cause a fall in the amount people smoke. Similarly, taxing income is a disincentive to earn income, while taxes are high people have a big incentive to avoid paying as much of it as possible, this is one of the many reasons why cutting tax leads to higher tax taken from the rich.

The second reason is a complicated tax system. Rich people have a lot to gain from avoiding tax, therefore they are willing to spend significant amounts to do so, they can afford to pay for very expensive tax lawyers, the quality of which the state would never be able to pay for. The more complicated a tax system is the easier it is for the lawyers and accountants of the rich to find loopholes or ways to pay minimal tax. Legislating against said loopholes would just be more pages in the tax code and would provide even more complicated means of avoiding tax. As already stated the tax code is so long that it is impossible for any one person to know much of it at all, that’s why if the tax code remains this complicated then it’ll be impossible for the state to stay on top of every piece of tax law and prevent people from legally avoiding taxes.

Simplifying the tax code therefore would allow the state to maximise its revenues, by implementing – as the Tax Payers Alliance suggest – a simple flat rate there is no way for the wealthy to avoid tax by getting earnings in different forms, if the tax rate is low enough not only will revenue increase from the growth this causes, there will also be very little / no incentive for the wealthy to avoid tax, nor enough financial gain to merit a large outlay on legal experts to allow them to.

If one cares for the institutions of this country, the NHS, the police, the schools, the only thing you should be arguing for is lower, simpler taxes. For every day taxes are high and complicated we are denying money to our public services and every person who argues against tax cuts and simplification is arguing for lower health care standards, less teachers, more tax avoidance and less money for the public purse.

 

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