Tories on tax

The Telegraph nearly wrote this entry for us. They have listed the winners from the recommendations of Michael Forsyth's Tax Reform Commission:

  • A couple with two children, one under five, with one earner working 30 hours a week and earning £15,000 a year
  • A pensioner aged 70 with an annual income of £8,500
  • Small companies and unincorporated businesses
  • A single parent with one child who works 16 hours a week and earns £7,185

What sort of crazy tax system is it that cares exactly how many children there are in the household, let alone their age, or how many of the adults are "earners", or how long the earner is working? Couples with children and single parents both benefit, so does that mean people without children lose out? At what point does a small company cross the threshold to become "not a small company", and will that disadvantage exacerbate the growing pains which all small businesses experience as they expand? How is this any business of tax policy, or any way to measure whether a tax policy is good or bad?

Why can't they just set out a few simple principles, and apply them equally to everyone. The most important thing they could have proposed was to reduce the complexity, because that is what produces the inequity in the system, the disincentives to work, distorts the economy and wastes our time because we have to shape our choices to the tax implications, and keeps hordes of bureaucrats in business checking that we have obeyed every rule and paid every penny.

Actually, they did propose principle. They are stinging in their criticism of Gordon's "tax superstructure". But they seem to have been caught on the horns of the dilemma created by two of their fundamental principles:

  • Tax should be easy to understand, calculate and collect; and
  • Changes to the system should be kept to a minimum

So we have an impossibly complex tax system, we need to make it simpler, but changes should be minimised. Can anyone spot a flaw in the plan?

No wonder what comes out is not a radical plan to bulldoze most of the superstructure, but a little rearranging of the furniture. OK, they do suggest one moderately radical move: scrapping inheritance tax, which will be popular, so long as people don't notice you will still be paying a death tax, it will just have been restructured as capital gains. And eliminating the starting rate of income tax is a genuine (if relatively minor) simplification. But shaving a couple of percent off the basic rate, though a step in the right direction, is not simplification. The introduction of transferable personal allowances in selective circumstances, which would have been unnecessary if they had had the courage to propose a flat-tax system, will actually complicate the system. And on the subject of Gordon's tax credits, the biggest disaster of social/fiscal policy implemented by this government, they suggest only establishing a Commission to recommend reforms and consideration of how to differentiate tax credits between lone parents and couples (yeah, that lack of differentiation really is the big problem with tax credits, isn't it?).

They are going to "consider" merging National Insurance with income tax "in a phased manner" (i.e. not quickly or simply). Taking both employers' and employees' contributions into account, NI is both the most regressive and the stealthiest of our taxes. It should be a no-brainer for abolition and rolling into income tax, in a supposedly "transparent" system.

But the biggest mistake is to treat taxes separately from benefits. People's effective and marginal tax rates - the things that actually affect their lives and choices - are determined not just by how much they pay to the government, but how much they receive from the government. The huge disincentive to take on additional work amongst the unemployed and low wage-earners is the result of marginal rates of taxation that sometimes approach 100%. Those marginal rates are not primarily the result of tax policy, but of the withdrawal of benefits. And for as long as moving back into work can cost you nearly as much as you earn, guess what, many of the unemployed or "incapacitated" are going to make the entirely rational decision that work doesn't pay. The Tories can promise to get rid of the minimal starting rate of 10% (payable on income above the personal allowance, remember), or shave a couple of percent off the basic rate of income tax, but the impact of these measures is insignificant compared to the disincentive of withdrawal of benefit at 30 or 40%. Until they get to grips with the problem of benefit withdrawal, their claims to be simplifying the system and helping those in need will be hollow.

Don't get me wrong, there's some good stuff in there. It's an improvement on what we've got, and on what the Shadow Cabinet have not been considering. But it could not be described as radical or ambitious. And the laughable thing is, these somewhat timid proposals are considered too radical by David Cameron and George Osborne, who are doing their best to distance themselves from them, or even refute them. Oh Brave New World.