Britain has one of the most complicated tax codes in the world. Though not as truly terrifying as the Mobius curve of the American regulations, the complicated exemptions and overlapping liabilities make even filling out a personal tax return a daunting process. For corporate tax liabilities, it usually requires a PLC an entire department to establish what liabilities might be.
It is not just the complication of the system, it is also the high price.
According to the OECD in 2006 Britain ranked ninth in the industrial world in terms of the size of overall tax burden, taking 37.4% of GDP in tax. Germany, Canada, Switzerland and the USA all take substantially less. Only the very high tax economies mainly of Scandinavia together with France and Italy take more. As Colbert once wrote, "the art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing".
Yet one reason why there is not so much "hissing" is that, for the corporate sector and for very rich individuals, there are many ways to use the complicated regulations to evade tax and reduce the overall tax burden. There are many jurisdictions that have dramatically lower tax levels than the UK, and by placing corporate entities in these places, substantial British tax liabilities have long been successfully mitigated or even eliminated.
Morally tax evasion could be seen as quite questionable- after all these individuals and institutions still receive the benefits from functioning in a society that is funded by other peoples money. Yet for me it is a quite clear example of the invisible hand in action- and often with the clear assent of the tax authorities themselves. Indeed the very buildings that the British HM Revenue & Customs- formerly the Inland Revenue- work from are owned though a PFI deal by an entity registered in Bermuda.
The fact is that the government itself recognises that the official tax burden in the UK is so extreme that it shows an imperial hypocrisy about the whole issue of tax avoidance. Officially HMRC condemns tax avoidance, but in practice it winks at many schemes. As a result there is hardly a single corporation of any size, including state corporations, which do not employ tax avoidance methods somewhere in their structures.
Simply to administer the incredibly complicated system of personal tax credits probably costs at least 20% of the funds involved- the exact number has not been permitted for release under the so-called "Freedom of Information act". The overall fiscal drag- the clearly very substantial costs of collection to the state, together with the indirect burden, including the employment of accountants and tax advisers not to mention entire company departments solely to deal with tax indicates that the total direct and indirect costs of tax collection and regulation in the UK could be as much as 30% of the tax take - a truly staggering £100 billion, or 10% of the UK GDP.
This is simply not sustainable.
By contrast, in Estonia the fiscal drag is negligible- the taxes are flat and very simple- so no need for accountants. The total cost of collection is continually reducing as declaration via the Internet becomes universal. It is quite clear that there is a model for Britain here.
Yet many oppose a flat tax rate because they believe that it is unfair that the rich should pay the same as the poor. Of course, ironically, our so called progressive taxation system has so many loopholes that the rich in Britain actually pay much less than the poor, so paying the same would be an improvement on the current position anyway. However there is a way to make a flat tax system progressive: set the tax threshold at quite a high level, so that the bottom 20% of earners don't pay tax at all. This would also eliminate the need for the ruinously expensive and unworkable system of tax credits that Gordon Brown's tinkering has created.
Tax havens have come into being to fulfil a clear need: the market has provided an answer to the absurdities of the UK tax code. Instead of struggling to put its fingers and toes into an increasingly leaky dam, the best solution is simply to create a bonfire of much of the current tax code. Simplification and clarity (and low cost of collection and administration) must be the watchwords.
Labour has failed- in the face of the greatest recession most of us have ever seen, there is no room for the scale of waste that the current fiscal drag imposes upon the British economy. Reform is long overdue.