Nov 10, 2019

If only our tax code were a one-liner, then it wouldn’t be such a bad joke

written by Lisa Eason

Why does Britain boast the world’s longest tax code, at 22,000 pages? Is it a sign of sophistication? Or perhaps an indication that we are a nation of tax dodgers? Or more likely, that tax law and administration here is a bureaucracy out of control, such that simply calculating and supervising taxation has become a horrible drain on productivity?

I supported the leave campaign in the 2016 referendum, in part because I felt the EU burdened business and citizens with oppressive regulations that made our economy less competitive. While there is truth in this, I have come to the depressing conclusion that the problem is compounded by our propensity for gold-plating any legislation and rules stemming from Brussels. In areas such as planning and taxation, for example, where the EU plays a modest role, we have systems that are over-complicated and stifle enterprise, and make home building and business much less efficient.

There are various elements in our culture — some in parliament, some in Whitehall, some in local authorities and various agencies of the state, some in the media, universities and unions — who believe we need more and more laws and regulations in order to become a more civilised and fairer society. To them, bigger government is better.

But the net effect of this relentless proliferation of red tape is to lower our overall standard of living. In effect, more regulations and more government crowd out the private sector. Yet it is the private sector that is the chief engine of innovation, investment, growth, real job creation and generation of tax. So ever greater state intervention ultimately impoverishes us all.

A recent wake-up call for me about this sorry state of affairs was provided by a book called Daylight Robbery, by Dominic Frisby. He is a rare beast — a libertarian comedian. I’ve seen him perform at the Edinburgh Festival and met him. His book, subtitled How Tax Shaped Our Past and Will Change Our Future, is partly based on one of his stand-up gigs, but it is far from a series of jokes. It is a highly readable account of a very dry subject, but one of paramount importance.

Originally, tax was collected mainly to fight wars, but these purposes have been superseded. Now items like social security take an ever-higher amount of national output. Tax is the chief weapon of income redistribution, and also a way of favouring certain industries and discouraging certain behaviours. Ironically, a much lower proportion is spent these days on defence and infrastructure.

One of the great myths is that tax evasion is on a larger scale than ever. This is almost certainly untrue: with dramatically more rigorous international supervision of banks, declining use of cash, and the rise of digital money and electronic payments, collection and compliance rates for tax have steadily improved. By making use of Big Data and artificial intelligence, tax authorities are likely to become ever more skilful at chasing down every last penny of tax owed. Tax collection and disclosure are likely to be more invasive.

If you are used to British levels of taxation, the arrangements in Hong Kong come as quite a shock. The top rate of income tax there is 17%. There is no capital gains tax, no inheritance tax, no tax on dividends and no VAT. Corporation tax is only 16.5%. Yet when GDP per capita is adjusted by purchasing power parity, Hong Kongers are almost 25% better off than we are. Possibly their welfare system is not as generous as ours, but their infrastructure is world class and their education system ranked fourth best in the world, according to the educational publisher Pearson. However, the most impressive aspect of taxation policy in Hong Kong is that its entire tax code is just 350 pages. How on earth can that system work with just 1.6% of the wording of ours?

Over the past 120 years or so, British politicians and civil servants have added layer upon layer to our tax system to extract more money from citizens through more complex devices. There are too many allowances and reliefs, and areas such as VAT, capital gains tax, national insurance, inheritance tax and the taxation of pensions are fiendishly convoluted. In 2010, an Office of Tax Simplification was introduced to offer independent advice to the Treasury to make things easier for taxpayers. It has obviously been a complete failure.

I would prefer a society with lower tax, greater economic freedom and more individual responsibility than the current model. Even if that is politically impossible, our government must dramatically simplify our preposterously onerous tax code.