Tax Policy
by Paul Hazelden


The Liberal Democrats Tax Commission published Policy Paper 75 in July 2006, "Fairer, Simpler, Greener" and invited comment. Here are my responses.

Start at the End

The executive summary describes the proposals 'for a new Parliament'. If you want a simple system, you have to start at the end point and work back. Once you are clear about where you want to go, you can engage in a sensible discussion of how best to get there.

For example, it assumes the existence of tax banding with just a few rates. This method was needed when you had to publish paper tables to enable people to look up what they have to pay. These days we have computers, and there is no reason why we should not have 20 or 50 bands, or a sliding scale, or even a sigmoid curve. A flat rate for the lower levels makes sense as many of the people with several jobs are below the national average.

Some Suggestions

Okay, here are some suggestions. Some of these are already in the paper, hidden in the detail.

Abolish National Insurance. The Employee's contribution should become part of the Income Tax, and the Employer's contribution become a new Employer's Tax, if it is decided to keep that element. But why tax employment? I thought we want to encourage it. Charge companies for their profits, not for the employment they provide.

Simplify the definition of a salary. At present, I have a notional salary. I pay Income Tax and National Insurance on parts of it, and a Pension contribution on all of it. My employer pays National Insurance on some of it and a Pension contribution on all of it. My salary is neither what I get, nor what my employer pays.

I suggest we redefine my salary as what my employer pays for me. This removes the whole employer/employee contribution distinction: I am paid a certain salary, some of it goes to me, some to the state, and some to my pension fund.

There should be no 'claw-back' on any allowances or benefits. Much of the present complexity comes from the state giving with one and and taking back with the other. If you get a benefit from the state, you are not taxed on it, and it does not reduce what you receive from any other benefit.

Of course, the tax-free amount should be no lower than the national minimum wage.

One Government Department should deal with individuals. Instead of one group of officials giving away money in benefits and another taking money in tax, with the two inevitably out of step much of the time, why not have one department responsible for both aspects? They have the responsibility of getting the calculations right, and the power to fix it when anything goes wrong.

If you want to be really radical, how about the Government giving every citizen the minimum wage as a basic benefit, and reducing everyone's salary by that amount? This removes the complication of a tax-free amount. And if the bulk of the population only pays a flat rate of tax, this means the employer needs to know nothing about most of their employees' tax affairs - they simply calculate the tax on the salary at the standard rate. It makes no difference whether the person is part time, or has several jobs.

Don't use the employer to do the Government's job. Forget about Tax Credits and individual tax codes: if the Government wants to give someone money, then do it directly - don't complicate the tax system to achieve these aims. Use Income Tax to tax income, and only income.

I like the idea of a Local Income Tax to replace the Council Tax. However, I have not yet heard enough detail to convince me it would work. You know whether a building lies within the boundaries of a local authority; telling whether a person lives in the boundaries and should pay tax to the local authority is much more complicated. It opens up the system to all kinds of abuse. What of those who have several homes? Or who live near their work midweek and with their families at the weekends? Inevitably, people will claim to live in the places where you pay the least Local Income Tax, which will lower the tax rates in those places still further and raise them in the places where they are highest.

A substantial tax on all land and all buildings would have several advantages: people who own derelict properties would have a real incentive to develop them or sell to someone who would, it will no longer be possible to hide the ownership of land, and the rich will pay more than the poor.

Stamp Duty should be treated like Income Tax, with a tax-free amount, and then an increasing percentage on the value over that amount.

Airline fuel should be charged a higher rate of tax because of the environmental effects of air travel. Scrap the flat rate charge on air travel, and get the money from taxing the fuel instead.

The UK should work with the international community to raise taxes on fossil fuels globally, thus making renewable energy much more cost-effective and encouraging people to be more fuel-efficient.

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Copyright © 2006 Paul Hazelden was last updated 28 August 2006
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