Simpler = lower?

This is almost unambiguously good news.  Britain’s tax code has become almost impenetrably complex over the years, and a decade of Gordon Brown – who liked nothing better than to try and tweak incentives through allowances, exemptions, differing rates and other assorted fiddling – made the situation much worse.  So this news is pretty welcome:

George Osborne, the Chancellor, is expected to order the closing of dozens, or possibly even hundreds, of tax loopholes in an attempt to boost revenues for the exchequer.

The Treasury estimate is that £42bn is ‘lost’ each year by the application of these loopholes.  Now, obviously, many of these are there for a reason – R&D exemptions for example – and I’d be very surprised indeed if there were a blanket removal.  But a lot will either be archaic or else so complicated that they are really only used by accountants seeking to lower an overall corporate tax burden.

Of course, tax simplification is only half the deal.  Once these loopholes have been filled, the obvious corollary is that tax rates can be lowered.  Politically this actually poses a risk for the Chancellor.  Given the background of fiscal tightening and the undercurrent of unrest, how feasible is it for the Chancellor to start lowering business taxes?  We have already seen, with the 50% top rate, that in this Government when politics and economics collide, it is politics that wins.

Maybe the best solution here, given that corporation tax rates are already scheduled to fall, is to use the bulk of whatever tax revenues are gained by this simplification either to raise the income tax threshold still further, or to cut the basic rate.  In the medium term, and only on the basis of OBR analysis on what its actual revenue benefit is, the 50% rate should be abolished.  That’s a plan for 2014 though…