I’ve just had a nice email from Mark Wadsworth about those tax proposals he wrote up for the Bow Group. He asks for my reaction. Err, OK.

Bwaaahahahahaha, gurgle, snort, ahahaha.

Err, OK, that’s unkind. Perhaps a rather more considered one. Mark tells me that he actually works in tax, which looking at the proposals actually makes a lot of sense. A great deal of paperwork gets cut out (GOOD!) but as he says, this is really a grab bag of all the ideas he’s seen which seem to be worthwhile. However, in some of them he’s changed them subtly. The problem is, I think, that he’s not quite sure why economists actually like certain taxes more than others, or doesn’t quite get the importance of tax incidence rather than rate or who signs the cheque.

That’s OK, he’s not an economist. Nor am I of course, just an interested amateur, but here’s where I think perhaps some ideas have been a little misunderstood, to the detriment of the proposals.

The personal allowance will be increased to
£11,000. Employee’s National Insurance and Working Tax
Credits will be scrapped and amalgamated into a single income tax
rate of 38% on all earned income above the personal allowance.

Fine, no problem. I would prefer to see a higher even that that personal allowance but so what. Flat rate tax, good. NI really is a tax already anyway. About the only reason for maintaining the difference is that a certain number of years (for pensions) or months (unemployment pay) must be paid for eligibility. As both of those are being scrapped, fine, merge it with the income tax system.

Employer’s National Insurance will be
scrapped and corporation tax will be increased to 38% on all trading,
professional or rental income.

Err, no. Business, qua business, doesn’t actually pay all of the Employer’s NI. Sure, they sign the cheque, but depending upon (what is it, elasticity of demand for labour? Something like that) at least some of the tax incidence comes from lower wages for the workers. Better to scrap it altogether and add the rate to income tax. Or, if we want to have I.T. and C.T at the same rate, then jiggle the rates a little.

The other thing is that Eer’s NI is paid when a company isn’t actually making any profits. Not sure how this system would deal with that. However, a much greater problem.

We actually want to abolish the taxation of retained profits altogether. This is, after all, what a compay uses to reinvest. Tax dividends as income, fine, tax capital gains (although more on that later) but retained profits? Shouldn’t be taxed at all.

Actually, there’s interesting evidence that even corporation tax, at least in part, is actually paid by the workers in the form of lower wages.

Gimmicky tax breaks such as R&D tax credits
or the Corporate Venturing Scheme will be scrapped. Business rates
will be reduced to 30% of the rateable value, without exemptions for
unoccupied business premises.

Abolish all such tax breaks. For business rates, see LVT below.

The UK’s tax year-end will be set to 31
December.  Businesses will pay tax on their accounts profits, subject
to pragmatic add-backs; unnecessary complications such as the
schedular system and capital allowances will be scrapped.

Fine

There will be no higher rate tax on dividends
from, or Capital Gains Tax or Stamp Duty on disposals of shares in UK
companies. Non-repayable income tax at 20% will be deducted from all
bank and bond interest, with no further tax being due. Gimmicky tax
breaks such as ISAs, PEPs and TESSAs, EIS, VCT and Film Reliefs will
be scrapped.

Err, no. We actually want to move further towards a system of consumption taxation. All additions to savings should be tax free, as all earnings from savings, as long as reinvested. It would be as if all of your savings were inside a giant TESSA. However, when you withdraw money from your savings you pay the full income tax whack on what you are withdrawing. The great joy of this is that it makes trust law entirely irrelevant for tax purposes. You have 20 millions invested in growing the UK economy? Great, good on yer. You got it from Grandaddy? So what? Ah, you want to spend some on a diamond tennis bracelet for the new mistress? 38% income tax please.

Council Tax, Stamp Duty Land Tax, Capital Gains
Tax on disposals of land and buildings, Inheritance Tax and the TV
licence fee will be scrapped and replaced with a “Land Value Tax”
of 1% per annum on the value of all residential properties.  The
first £70,000 in value per household will be exempt.

Nope. LVT is on the undeveloped value of teh land, not any development placed upon it. Henry George and all that. The reason why even people like Milton Friedman support this is that we want to tax things with the least distortion possible. As they’re not making any more land (nor, subject to the sea walls staying up, unmaking any) taxing the rental value of land is the least distortionary thing we can do. What the hell its got to do with the BBC though I don’t know. We’re going to sell that anyway.
The other thing is that it should not only apply to residential housing. It should apply to all land. That owned by the Crown, business, MoD, farmers, the lot.

Child Benefit will be increased to £36
per week for children under 5.  £60 per week will be payed
towards nursery costs for children aged 2-4.

Nope. Scrap it. Breeders should pay for their pleasures themselves, just as drinkers should and do.

Adults not in paid work (or earning less than
£11,000) will be entitled to a non-contributory, non-means
tested, non-taxable Basic Cash Benefit (“BCB”) of £80 per
week, but will not also be entitled to a personal allowance for tax
or PAYE purposes.

This had to be explained a little more to me. You opt either for the personal allowance or you take the handout and pay 38% on all other income. Me, I’d prefer a Citizen’s Basic Income. For political reasons, set at the pension guarantee amount (113.50 a week isn’t it?). All adults get it. Everything else goes. Unemployment, state pension, invalidity, housing subsidy, child benefit, everything.

From age 60, the BCB will increase by £3.75
per week for each year of age, up to age 71, at which point it will
reach the maximum of £125. At age 66 the payments will be
re-branded as “Citizen’s Pension”

See above CBI.

The State Second Pension entitlement will be
frozen and phased out over time.

Meh, whatever.

Tax relief for private pension contributions
will be 38%, but restricted to the first £4,400 gross
contributions per annum (£2,728, net of tax)

See above on savings.

BTW, I realise that a high personal allowance, a high CBI, no taxation of savings until consumption and an income tax rate of 38% are not compatible. Not all of them at the same time. They are goals, the rates and levels need to be adjusted so that they are indeed compatible. A CBI at the level indicated will be 280 billion a year, for example. More than 50% of the current tax take.

Anyway, them’s my views.