I am really trying not to be a politics bore, but our personal tax system really needs sorting out. It is costly to run, labyrinthine in its complexity, and affords far too many opportunities for intrepid (rich) taxpayers to avoid paying their fair share. The same goes for our benefits system, which is so complicated that you need to fill in a 36 page form (from memory) to get even the most basic benefits. The range of entitlements is wide, but basically the purpose is to ensure that your income reaches a minimum level allowance (MLA) that the government deems necessary for you to live on.
A personal tax and benefits system should be the simplest of formulas and should need no more than the following rules:
- Any earned or unearned income, or benefit in kind, or exchange of services and so on (you get my drift, clamp down on non-monetary mutual benfit systems) is taxed, although I will exclude two income types: competition prizes; and money up to the value of the MLA that is transferred from one individual to another, that has already been taxed.
- Set a personal allowance (PA), which should be at the MLA. The PA should be taxed at 100%. Yes, that is right, 100%, because…
- The government gives everyone the MLA, effectively as an annual salary, paid monthly. People in employment have their MLA paid through their PAYE system, so effectively the 100% tax on PA nullified. People who are unemployed receive payment direct to their bank account. Combined with the 100% tax on the PA, this guarantees that everyone, working or not, receives at least the MLA as annual income. The result of this is that we do not need a large system of benefits offices. Not all of these people will be thrown on the scrapheap though, because some can be retrained and redeployed to help police the crackdown on the black economy (see below).
- Scrap national insurance (NI), because it is just another tax. Merge it into the standard tax rates. This would mean that lower earners would have a slight benefit with my suggested tax rates in the next point, because effective basic rate tax is currently 31% (20% tax and 11% NI).
- Set tax bands, which should be integer multiples of the full-time average salary (FTAS) of the previous tax year. For this calculation, part-time salaries should be recalculated to the appropriate full-time level. Other measures, such as the average wage, or household wage, are meaningless because they attempt to average values that are not comparable. A suggestion would be that the first two FTAS of taxable income is taxed at 30%, the next two FTAS at 45%, and set other multiples at the discretion of the government of the day.
- Special conditions, for example, coping with couples, can easily be dealt with by the use of tax code restrictions and allowances, in the same way as they are at the moment.
That is it. No loopholes, tax incentives or anything else. Items such as pension contributions and charity donations can still be tax-exempted. The important principle is that any received money is taxable, subject to point 1 above. Basically, if you work in this country, you get taxed in this country. No non-domicile status (politicians and rich magnates), no dodgy policies about only being resident here for up to a limited number of days a year (rock stars and other “celebrities”). Income = Tax!
This system would save billions of pounds in administration costs, but crucially relies on a robust enforcing of legal and above-board work. No black economy workers, and a cultural change that makes cash-in-hand work unacceptable. Fortunately, in our wonderful technology-driven world, this is now achievable and the policing and enforcement could be funded through the administrative savings from the current bloated and expensive tax and benefits system, and the swingeing penalties that would accompany non-compliance. The inherent fairness of the system, where everyone is treated and taxed fully and fairly, would be a massive change from the current real and perceived differences between how lower and higher earners are treated in the tax system. I believe that this would make people more willing to work with a tax system, rather than wriggle against it.