Thursday, May 15, 2008

Tax planning

The Tories have explicitly ruled out 'upfront, unfunded tax cuts' (like Brown's latest presumably), but what they haven't done, and really, really shoudn't do, is rule out radical reform of the entire tax system. Something that has given me slight hope in this regard has been Cameron's notable lack of committment to re-instating the 10p band. It would have ben simple and easy opposition politics to pledge to restore it, muttering something about 'helping the nation's poorest'. He hasn't done that, and thank goodness.
Because the 10p rate was a symptom of Labour's problem - their belief that complication is synonymous with sophistication. Look at the bottom end of the tax code (and remember that Tolley's the tax specialists' bible has doubled in size since 1997). It's a mess of tax credits, allowances, and ludicrously low entry rates to income tax. The tax credits, heralded throughout as Brown's principal contribution to the British economy, are noth over-complicated and counter productive. They impose an absurdly high marginal tax incidence on low earners if they seek to break out of their subsidised realm - as high as 80-90% in some cases. They are a nightmare to administer, causing embarrassing over payment as well as sky-high administrative costs, and the benefits they hand out are often swallowed back up by the income tax take.
The Tories must look to simplify this mess. The best way to do this is probably via a substantial increase in the personal allowance. Much of this can be paid for by a scaling back of tax credits, more by that nebulous concept of 'cutting waste'. People are very fond of saying that there is never any fat to be trimmed, but then Ken Livingstone said that, and he was publishing a private newspaper, and ordering 40 copies of the Morning Star every day. Moral? There is always some obvious waste to be dealt with.
This is, of course, very back of envelope stuff - as David Cameron said, 'we have four people, the Treasury has 3,000'. I don't even have four. As such, it isn't really a policy, so much as a principle. The poorest should not be paying income tax - it is absurd that income tax kicks in after 20 hours a week at the minimum wage. Tax ought to be straight-forward and as unobtrusive as possible - Lawson's rule of low, simple and compulsory is as true today as it ever was. So, if the Conservatives do get back into power, they should do two things: announce a public audit of the national finances - including PFI - and then carry out plans to simplify the tax code wherever possible.

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Blogger Letters From A Tory said...

People seem to forget that Thatcher didn't really cut the tax burden, but she shifted it onto indirect taxes instead. Maybe Cameron is thinking along the same lines.

10:17 am  
Blogger Tim J said...

Thatcher removed a series of exemptions, significantly reduced the top rates of tax - to a level where the take actually rose (paging Dr Laffer...) and effectively rationalised the tax system to a degree.

Labour have progressively complicated it, to the point where one genuinely does need to be a tax specialist to understand it.

12:49 pm  
Anonymous Anonymous said...

nice calvin and hobbes reference there

9:47 pm  

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