Tax is always portrayed as a burden. Low tax is always seen as a virtue. Surely the question should be whether the government, given the tax receipts, is providing services of a satisfactory quality, not what the level of tax is? One fundamental issue is Britain's 'tax take'. It's 33% of GDP - and nothing works. In the majority of EU countries the tax take is 39% of GDP, and everything works. We have failed to tax properly, efficiently and fairly.
Government’s role is to ensure that the right amount of tax is raised to deliver high quality public services. As an instrument of economic policy, tax is raised in the national interest and for the benefit of all. Honest and fair taxation is what the electorate has a right to expect, but it is not what it gets.
For years there has been constant pressure from wealthy elites and corporations on government and politicians to pursue a low tax economy. The reality is that Britain cannot afford a low tax economy, and it is not in the best interests of the majority of British people to have one. The effect is now clear to see, a redistribution of wealth upwards, and the shredding of public services. Our tax system has become skewed towards benefiting the few at the expense of the many.
The British people have the right to expect 'just taxation'.
Accumulated capital has not been used to stimulate investment in the economy. Instead, successive governments have allowed it to be hoarded and invested by the few, for the benefit of the few. We freely allow accumulation for accumulation's sake. As a result we have a rentier economy that does little to benefit the many. Governments have failed to tax honestly and fairly. The consequence is an unbalanced, investment-starved economy, and a divided society.
Added to this, the tax system is hugely complicated, distorted by decades of tinkering and tweaking by successive governments. The tax system needs to be rebalanced and to undergo complete reform.
Changes should include:
a) Company taxation: Germany has a highly successful economy and a corporation tax rate of 30%. We have a failing economy and we have only just increased our corporation tax rate from 17% to 25%. Corporation tax will now start to yield more revenue but it is nowhere near enough. We have moved from a merchant economy to a digital one and tax laws have not kept up with this change. A huge amount of revenue is being lost. The burden of replacing this loss of revenue has been placed on the general population. As a consequence demand is suppressed and investment minimised. In addition, global companies who do significant business in the UK can get away with paying very little tax. Corporation tax needs replaced by a trading tax, or a destination-based corporate income tax based on consumption rather than on profits.
b) Tax reliefs: Tax reliefs to business and individuals now cost over £155 billion per year, more than all spending on health, transport, justice, home and foreign offices – reliefs that are under-scrutinised, under-policed and badly targeted. Some reliefs are necessary, but too many reliefs are opaque and their benefit questionable. Some have become so ‘established’ that their original purpose or benefit has become lost in the mists of time. Others, like pension contribution tax relief, are taxes that give an advantage to some and not to others. These anomalies must be ended.
c) Unearned income taxed at the same rate as earned income. Capital gains to be taxed at 40%. It's been estimated that an extra £16bn a year could be raised if the low tax rates on profits from shares and property were increased and brought back into line with taxes on salaries.
d) Inheritance Tax: Failure to tax inheritance properly is multiplying wealth inequality. 60% of wealth is inherited. We should levy tax on recipients rather than on estates. This tax currently raises only £5 billion pa. This reform would result in this tax being simpler, more equitable and would help to significantly reduce wealth inequality.
e) The cap on employees' national insurance contributions would be abolished.
f) Taxing wealth: We need to explore ways of releasing 'excessive' accumulated wealth so that it can be used to generate economic activity and to benefit society. Private wealth has soared to six times the value of annual GDP. Inequality has soared too because this imbalance has not been addressed. Wealth grows faster than wages. Do nothing about this - and nothing has been done - and you generate massive inequality, and we have.
We need to consider a one off levy on wealth.
The Institute for Fiscal Studies 10 years ago produced its Mirrlees review offering a totally reformed tax system, removing unjust reliefs and rebalancing more fairly. But the government moved in the opposite direction – taxing hard work more and wealth less. We could start by revisiting this report.
g) Tax havens: The amount of money stashed in tax havens worldwide is estimated to be worth in excess of $22 trillion. This is money that should be fuelling the world economic activity. The existence of tax havens which allow companies and individuals, many of them British, to avoid paying tax, or criminals to hide their loot, is unacceptable. British Crown Colonies tax haven status will be ended.
h) Tax Avoidance: Tax avoidance has become an industry in Britain. It's happened because tax laws are complicated, convoluted and have gone unreformed for too long. The reforms proposed will help to simplify the system. Legislation is required to rein in 'avoidance enablers'. A root and branch reform of the tax system is required.
Tax must be fair and appropriate. By eliminating distortions and anomalies it will create a better distribution of wealth and release more money to generate greater economic activity. It will also reduce inequality.