Ignore the platitudes of Labour and the Tories: getting the tax system right is harder than rhetorical flourishes about stopping avoidance and evasion. And it’s harder than fiddling about with rates or thresholds. Sharpening the wrong tools won’t get the job done.
On corporation tax, to ignore that capital is mobile and that the tax systems of different countries tax systems dovetail together poorly is wishful thinking. Steep rises in corporation tax rates without addressing these structural difficulties won’t end well.
The best solution is international co-operation – where states club together to tax corporations and then share the fruits. Plug the leaks between tax systems and avoidance becomes much more difficult. And if capital has fewer places to flee, higher rates translate more readily into higher receipts. The EU is embarked on exactly such a project: a “common consolidated corporate tax base”. Who knows whether this – and other EU led anti-tax avoidance measures – contributed to the enthusiasm with which tax dodgers funded the Leave campaign?
But if we choose to absent ourselves from the best systemic solution we will need to become more imaginative.
A very substantial source of avoidance – practised by the usual suspects, Google, Facebook, Airbnb and others – involves selling into the UK from foreign tax havens. We should tackle this with a Foreign Sales Levy on large companies who engage in that practice. Base yourself here and you can pay corporation tax – but if you choose to game the system by selling to UK customers from tax havens you will pay a substitute for the corporation tax you are dodging.
Higher taxes on income are – by and large – another triumph of rhetoric over reality. The evidence that raising rates will produce meaningful additional receipts is slim to non-existent. In any event, it is simply wrong to punish hard working strivers but ignore the asset rich. The trend should be to cut taxes on income – and especially on National Insurance Contributions which are regressive, privilege unearned over earned income, and punish responsible employers – and increase taxes on wealth.
We do have a wealth tax – when income is passed between generations – but state sponsored loopholes for particular classes of assets render it insignificant as a revenue earner. Instead it acts to create false markets in those asset classes – their value is inflated by their use as tokens to pass wealth tax free between generations.
We must be radical.
We should halve the rate of inheritance tax – the current 40% rate is confiscatory – but reduce the threshold so it is paid by the top half of estates and applies to substantially all transfers of capital above £100,000. And we should remove the exemptions for special asset classes and special trusts. These measures will be hugely cash generative – and fairer by far than the current system.
We must also commit to a proper annual wealth tax. An inevitable consequence of the march of technology will be greater concentrations of wealth. We must have fewer and lower taxes on income; more, higher and better taxes on wealth.
We spend well over £100bn a year on tax reliefs that go overwhelmingly to the wealthy. We spend over £28bn per annum – £540m a week that could be spent on the NHS – exempting homeowners from capital gains tax on increases in house prices. Over £26bn more – £400 a year for every man, woman and child in the country – is spent subsidising savers. We do this without any analysis of whether this is the best way to spend this money. A new Party should conduct a rigorous review of all of the major tax reliefs and ensure that this massive expenditure generates benefits for all of us. Where it does not, we should not be afraid to tackle the vested interests of land-bankers, buy-to-let landlords and the financial services sector.
And we should reform Council Tax. For the lowest earning 10% of households, Council Tax (after Council Tax support) consumes a staggering 7% of household income (including benefits). For the highest earning 10% of households, the equivalent figure is 1.5%. We must extend Council Tax bands so the owners of expensive properties make a fair contribution. And use some of the proceeds to reintroduce a Council Tax Benefit that reduces the effect on poorer low earners.
This is not the place for a full review of all of the weaknesses of our tax system. But it is clear that there is far more to be done than the thin gruel of the Labour and the Conservative Manifestos of 2017 admit.
[This is the first of a series on how the sepia-tinged 1970s socialism of Labour and the Victoriana of the Tories leaves plenty of room for those who believe today’s problems won’t be solved with the ideology of yesterday.]
Is a Foreign Sales Tax compatible with your wish to remain in the single market after Brexit, seeing as many foreign sales into the UK originate from places like Ireland, Luxembourg and the Netherlands?
A thoughtful article. Clearly we need to remain in the EU and stop campaigning for the rich.
I think the post says that the better solution is a common consolidated corporate tax base…
Yes, so you’re saying that the best option is enthusiastic EU membership but the second best is very hard protectionist Brexit.
That doesn’t really match your usual view, which seems to be for a very soft Brexit if we have to have one at all.
No. That’s not what I’m saying. If we’re not in the EU we will be free to adopt this second best measure.
Every single view I’ve ever heard on taxation, and critique of that view, seems to be from the point of left, right or centre. There no party advocating a balance of responsibility.That corporations have the same responsibility to pay for the infrastructure as individuals. With ERNIC and income tax an average worker pays around 20%, Tory aspiration to reduce corporation tax to 15% is poison, and the current tax arrangements where the larger the corporation the more it can avoid is disgusting. To have a system which aims to tax larger corporations higher than SMEs, as we do wealthier individuals so that overall there is a balance of responsibility. Voters can get behind a system where there is an acknowledgement that however ‘left’ a system is on corporate taxation (which would be heavier than those on the ‘right’), that is exactly how far ‘right’ it should be on individual. (Oh and while where at it, making it illegal to misrepresent issues to the electorate in the run up to an election would do wonders to strengthen democracy which is under threat – you can’t misrepresent the benefits of a toothpaste but the likes of Davis, Johnson, Gove et al can say any old rubbish with impunity)
I would expect that if the EU adopts the CCCTB it would be more than happy for other, friendly non-Members to join them in the endeavour. Places like Norway would probably like to do so. The UK could too. The real difference being out of the EU would make would be that we would probably have little influence in driving the process and helping get it right.
This sounds like an excellent start. While we’re about it, let’s also level the playing field by getting rid of the remittance basis and IHT breaks for non-doms altogether; a historical anomaly that has no place in the modern U.K. where sensible tax treaties and reliefs can deal with any double taxation issues.
LVT tax and abolish Corporation tax, council tax and business tax? also public places ,national parks,beaches ,farmland & government buildings exemption.
It’s all very well suggesting a tax on wealth, but for someone like myself it seems grossly unfair. I am a middle aged middle earner (circa £30kpa). I have always been frugal, gone without nice shiny things, and instead invested my money in my home – effectively accumulating wealth (and reducing my debt) rather than spending my income. Recently, as I have no faith in pensions, I have also bought a 1 bed buy to let flat which I intend to use as a source of income in retirement.
How is it fair to tax me on my wealth which I have only accumulated by going without all my life? Why should I suffer double taxation whilst others spend and enjoy their income? It seems to me like yet another way to reward those who don’t take care of their own financial security.
Good points all.
As a layman, I have tried with an alternative to financial transaction tax, to promote purposeful investment, and disincentivise arbitrage trading.
On reflection, the solution quests to have broad applicability, and aspects potentially advantageous in other taxes.
Much/most wealth is invested in assets.
We already tax assets, through CGT on realisation of the asset value.
Few ordinary working people, just about managing, pay CGT, so this would be a progressive tax change.
By changing CGT, it is feasible to tax wealth not on its own value, which is always contentious, but on the purpose and societal benefit of the investment made.
Pretty much all tax is calculated by computers, which are capable of more than just percentages, and thresholds, which characterise most tax regimes.
Quite simply, in principle at least, we could vary the rate of CGT by the time an asset is held.
The shorter time an asset is held before being traded onwards, then the higher the tax rate; the longer an investment is held, the less tax on the value realised.
I would suggest instead of the usual banding and thresholds, a smooth mathematical function could be used to progressively vary tax with length of ownership, to minimise market distortions caused by decisions to keep or sell according to random legal/tax thresholds. Usual inverse exponential chart shape, time on X axis (0-infinity), %tax on Y axis (0-100%).
The overall tax take could be balanced around a nominal typical time for each class of asset.
In this scheme, the devil in the detail will be identifying asset classes, and assigning the nominal typical time of ownership. There should be enough data for most classes, however, to agree a statistically sound value – there is a case for automatically adjusting each typical time regularly based on data to ensure that the tax remains fair.
The time might be longer for houses, than say for stocks and shares.
Holding a share for 10 years, which might indicate a serious investment in a business, could attract a far lower rate, than say trading it in milliseconds, which more likely indicates arbitrage on market pricing, with less social value – shorting is a mathematical exception to the formula. Trading losses would also need some thought.
Derivatives are surely not impossible to classify for natural/desired life cycles, but I have little insight into modern derivatives.
An advantage of a smooth mathematical function is that at both high and low values it should still be progressive, unlike say Council Tax.
Trading ever quicker would attract ever closer to 100% tax, while holding an asset for ever longer would continue to reduce the tax, for example, on the aged selling family homes.
Tax authorities would have at least two degrees of freedom in setting tax rates. First the typical period of ownership for each class. Second the percentage rate at that length of ownership. Both would adjust the curve of the chart, the overall and relative tax take.
Primary homes, working family farms, etc., could all be included in the main scheme, reducing the number of exemptions and exceptions.
Long term investment in successful businesses would be rewarded with lower taxes. Failed business investments would not attract tax.
Traders would of course object that this scheme would reduce the number of transactions. But I am unclear what value excessive trading of assets adds to the sum of human wealth.
The scheme could be introduced, beta tested, on a single class of assets to see how those affected start to play the game, the unintended consequences, before being rolled out more widely.
I could go on in more detail, but you should have enough to get the general idea.
Make of this what you will.
Not disagreeing with scrapping Council Tax. It is very regressive. But we should look at the bigger picture. All local taxes are regressive. The poorest localities will always have the highest tax rates, the worst public services or both. Taxes should be imposed and collected nationally but distributed as appropriate amongst local authorities to be spent locally.
Agree that unlimited PPR (principal private residence) relief for CGT (capital gains tax) bungs too much money at the already well off. It should be capped at (say) £50k plus £10k for each whole year of ownership. Any gain exceeding that should be taxable. On the subject of CGT,
– the annual exemption is too high and should be reduced by half or more and
– the tax-free uplift on death is unjustifiable and should be scrapped. Disposals on death should be treated in the same way as any other type of disposal.
I agree with much of this, but have three observations and a question. Observations: (1) there would undoubtedly be real political difficulties cutting higher income tax rates; the usual cry would go up of ‘tax cuts for the rich’, even if (as recently) the overall picture is of higher tax on higher incomes; (2) the consequent temptation far any party would be to increase tax on capital and retain current (or higher) income taxes; (3) is it not a rather tired misuse of language to use the word ‘spending’ to describe the state’s behaviour in refraining from taxing certain classes of income/savings/assets?
Question: assume problems (1) and (2) are overcome/avoided, is there an issue of inter-generational fairness? Would it be necessary to ensure that the older taxpayer is not subjected to high income tax under the old regime and then, under the new, to high wealth tax on what they saved from what was left? What would a fair and adequate transitional set up look like?
Agreed, the current tax system is an incoherent shambles. Whatever became of the Mirrlees Review ?
Unfortunately, I cannot see any party advocating the introduction of CGT on main residences getting elected in this country…….Do you happen to know if any European countries do currently levy CGT or similar on main residences ?
1) Impose a ~5% sales based Witholding Tax that can be collected with VAT (mandatory registration for exempt businesses) and set against subsequent Corporation Tax (~10% for individuals that can be set against Income Tax). 2) Make Corporation Tax a function of dividend paid and total remuneration Gini coefficient. 3) Replace Council Tax with a regional (or national) Land Value Tax that is redistributed.4) Strike off charities that contribute nothing to society and are essential tax avoidance schemes. 5) Merge income tax and NI, replacing the consolidated tax allowances and most benefits with a universal basic income. 6) Regionalise England and devolve housing policy to the regions and nations. 7) IHT – tax the recipients with some tax allowance, not the estate.
What needs to be done is to get the message over that tax is destroying money,that it’s the sale of bonds that creates new money and two things need to happen to money i) it must be put to work otherwise it can’t even pay itself back let alone interest ii) when you pay tax your paying back those bonds + interest ,if it isn’t a progressive tax based on wealth then anyone paying less than there proportion of wealth is gaining unearned wealth and anyone paying more is losing wealth ie 1% pay 23% of tax but own 95% of the wealth,so 99% own 10% of the wealth but pay 77% of the tax,so has we know for the poor money is extortion even priceless because credit is inaccessible or if they can at 1500% apr,yet for the rich its at nearly zero,so why invest at all when you can create more and more money and you only pay 23% of it back,where’s the incentive hence why we have £200m footballers,housing bubbles,bond bubbles and economic dynamism is stagnant all at the same time,cheap money yet money that is also priceless to some! .they just create more and more money which pulls more and more people into debt because the reality is less and less wealth has to pay for those who don’t need money but have no incentive to put the money to work because there are no returns on investment and never can be i) under this tax system ii) unless wages rise proportionately with the money created to put it to work
That should read 90% but the figures accuracy aren’t important actually the point it makes is!
I’ve never been happy with the idea of taxing success, especially where the greater the success the higher the rate. If you want corporation tax at all, surely it would be better to encourage larger profits and therefore a higher tax income by offering reduced rates for higher profits? Then we would have business trying to locate their profits in the U.K., and trying to make large profits, instead of all the dodging that goes on at the moment. Let’s attract all the profit-making businesses of the world to the UK and charge them 5% tax for their first £10m profit, then 2.5% tax on profits above that. Our tax income would rocket and business would boom.
It is such a pleasure and relief to read thoughtful, creative, constructive policy ideas for the modern world. I am so sick of the bitching and backbiting of the current crop of politicians amd commentators, and so sick of the nostalgia and reversion to old ideas that they peddle for want of any imagination and leadership. While the business world is relentlessly and compulsively forward-looking, the politicians and civil servants have nothing to offer but in-fighting and re-heated mid-20th century ideas. I will follow your blogs, I will continue to offer my own ideas on Medium (for what that’s worth), but I hope that before too long you’ll call a meeting. Let’s get this party started!
There’s an interesting analysis on the counciltaxsupport web-site which suggests that getting the income-based benefiterati to pay more than 20% of the standard charge is counterproductive. The extra administration and court costs start to exceed the extra income gained from the additional amount.
So Waltham Forest, Kettering, Lewisham, Wandsworth, Harrow, Wakefield and many many others, get your acts together and make your boroughs nicer places both for yourselves and the low income groups by cutting the CTS baseline.
Land value tax to tax the asset rich and avoid land banking.
Basic universal income to encourage people to work harder to increase wealth, everyone begins on a level playing field. This simplifies and reduces costs within the benefits system and for HMRC. Give folks the option to opt out if they don’t need it.
Even UK registered Companies, legally manipulate their profit to reduce corporation tax payments, a small transactional tax would raise large sums and close accounting trickery!
I’d be interested on your thoughts concerning the EU’s proposed Common Consolidated Corporate Tax Base: https://ec.europa.eu/taxation_customs/business/company-tax/common-consolidated-corporate-tax-base-ccctb_en
And in particular the evaluation of Mario Monti’s High Level Group on Own Resources of future forms of revenue for the EU’s budget that could include EU-level corporate income taxes.
If the EU did go down the road of an EU CIT, it would directly challenge the UK’s post-Brexit attempts to engage in agressive tax competition.
Link below to my blog, which also has a link to this blog.