Tuesday, 10 March 2020

The UK is too taxing

Rishi Sunak will present his first budget tomorrow. At least, unlike the Saj, he gets to wave the red box outside no 11 and drink something other than water in the House. His job will be to definitively end austerity (whether or not you believe we actually had real austerity) while not scaring the horses, in terms of the already spooked financial markets and leaving some scope for tackling the unfolding coronavirus epidemic.

As a financial conservative I fear that the UK is about to get even more taxing, the overall tax take at 34.4% of national income already being the highest since it was on the way down after the peak levels of the second world war*. But that is better than bequeathing even larger debt to the next generations, as well as a congested, polluted planet and a very limited carbon budget. However, as Johnson's government seems to have no ambition whatsoever to be a low-tax party despite their characterisation by some as a very right wing government (eh?) I accept that reducing the tax burden isn't on the agenda at the moment: I just hope to see a limited or zero net increase.

We'll see how Rishi does. A chancellor's first budgets are often their best chance at making significant reforms. The longer they are in office the more they seem to get constrained by their previous decisions. But as Rishi hasn't been there long and the scene is pretty well already set (tweak the rules to spend as much on infrastructure as can feasibly be spent, prepare for stage 2 of Brexit and coronavirus) maybe we shouldn't expect a really radical budget.

If I had my way the best thing the chancellor could do would be to throw away the whole tax structure and start again. Why? Because the UK's tax code, having overtaken India's in size in 2009 at 11,250 pages had, by 2016 grown like Topsy to 17,795 pages. More than 10 million words, 12 times the size of the King James bible.

I found an esoteric article written on behalf of the Office for Tax Simplification in 2012** which noted that the Yellow Tax Handbooks (it was once one book, then two and then five) included duplicated material, explanatory footnotes and the text of various Finance Acts so actually a bit less than 35% of it was actually "substantive, unduplicated administrative legislation". Still equivalent to 5430 pages even then.

But some Orwellian characters clearly took over the Tax Simplification task - or maybe it was just that George Osborne became chancellor - so our tax code got even bigger. I've read somewhere that it now runs to 22,000 pages. One of the reasons is that governments can tweak the tax code as part of the annual Finance Bill without other primary legislation - indeed often without actually announcing it in the budget statement, people find out about it afterwards trawling through the pages of bumf. Gordon Brown pioneered this type of stealth tax by stealth. Another reason, as David Smith has pointed out, is that complexity increases as a result of parties having to avoid breaking manifesto pledges on headline tax rates. Brown and Osborne were outstandingly good (well, bad actually) at all of this.

The result is a system that is far too complex and riddled with unfairness which only encourages avoidance. Loopholes are harder to find if tax is levied on a simpler, progressive basis. Too many reliefs and allowances clutter the system. Pensions and inheritance tax are so complicated some professionals won't advise on them.

I've written before about the horrendous pension taper, which is behind the nonsensical situation in the NHS where consultants have had to limit their hours or have even decided to retire early to avoid inadvertently triggering punitive immediate tax charges amounting to tens of thousands of pounds. I realise these folk earn well in excess of £100k but the laws of human behaviour are immutable: why on earth should they bother working only to get financially punished for it? Boris Johnson said this would get sorted (we'll be watching) and it needs to be sorted properly not just for NHS consultants.

My tax manifesto would look something like:

  • consolidate national insurance into income tax, thereby avoiding the anomalies where some low earners pay national insurance but don't gain from tax credits (as they don't pay income tax) resulting in high marginal rates of tax for some of our least well off. This would also effectively scrap the upper limit on NI, thereby effectively increasing the tax rate for higher earners
  • in return scrap the ridiculous pension taper (which also produces very high marginal rates of tax) and the lifetime limit for pensions which discourages higher earners from saving for their retirement
  • I would consider making tax relief available for paying into pensions at basic rate only, though this presents some complexity for tax collection and payrolls on which I'd want to see some proper analysis. Many chancellors have looked at this change, which would only hit higher rate taxpayers, but would bring in several billion. It will probably happen one day, so why not as part of a simplification package? 
  • if the above change made sense I would increase the annual limit for paying into a pension and increase significantly the starting rate for higher rate tax, as many folk in very ordinary occupations now pay higher rate tax, which can't be right
  • for other taxes I'd start from a "zero budget" approach of scrapping all allowances and reliefs and keeping only those that can be justified as genuine investment of taxpayers money. R&D reliefs for business might be an example, but they can be abused so I'm a sceptic
To make these changes command widespread support there might have to be a decrease in the basic rate of income tax. Part of the problem with reform is that there are winners and losers. If you aren't to have too many losers you end up with a tax giveaway just to make the change. This might not be affordable at the moment when the government wants to spaff our money up the wall (sorry but as both Johnson and Corbyn have used this phrase I assume it's now normal political speak) on expensive projects with dubious paybacks like HS2, Northern Powerhouse stuff and "levelling up". (That's not to say I disagree with those projects but they may not prove to be very good investments, at least for a very long time indeed).

The Hong Kong tax code (in its entirety) is just 350 pages. Maybe we could get ours to 3500?

I live in hope but not expectation.......

https://www.theguardian.com/business/2019/nov/13/richest-britain-income-tax-revenues-institute-fiscal-studies This article led on the fact that the top 1% of earners now contribute more than 30% of income tax receipts, up from 24% in 2007-08. Golly we depend on those much maligned high earners to pay for our public sector......

** https://www.taxjournal.com/articles/reviewing-length-uk-tax-code-39911 This article was written on behalf of the Office for Tax Simplification: does that count as an oxymoron?


  1. So Phil, your application to be Director General of HMRC has been accepted and what's more you'll be doing a work-share arrangement as Governor of the bank of England as well.

    As for austerity, a subject filled with more political rhetoric than just about any other, especially from our socialist comrades, a look at the IFS review of the 2010 - 2015 Parliament makes interesting reading - Planned Tory cuts £96b, planned Labour cuts £82b, planned Lib Dem cuts £80b, actual cuts in that Parliament £81b - yes £1b less than Labour planned to make had they won the 2010 GE!

    1. Hey mate, I only just caught up with this comment just now. Thank you but I don't think I can accept those appointments unless the coronavirus lockdown means no golf for the duration of the contracts. The data from IFS is fascinating. So the cuts were only £1bn more than the LibDems proposed! And of course these weren't real "cuts", they were reductions in planned increases. So what say you now about austerity? I'm not saying there weren't cuts in specific areas, so sure you can question the choices made but spending did need to be contained overall else we'd have headed into the current crisis in a much weaker state.
      Personally I would have cut deeper then (the Irish did and benefitted) and with hindsight I still would. In business it's usually considered best to make the pain sharper but get it out of the way quicker rather than spreading it out over many years like Osborne did, though I accept the analogy breaks down if pushed too far.