Wednesday, October 12, 2011

The Real Tax Scandal

The news that 98% of FTSE companies use tax avoidance is being reported in the usual "shock-horror" terms of corporate greed. However those protesting are aiming at very much the wrong target. When even the HMRC itself- never mind the corporate sector- uses tax avoidance structures, it is clear that something fundamental needs to change.

The UK tax code is the largest in the world. It currently stands at an astonishing 11.250 pages. This is five times longer than the German code. Many of the provisions of this code  are contradictory. It is impossible for a single person to understand, still less comply, with all of the provisions. The creation of the Brown system of tax credits has also made it incredibly expensive to administer: an estimated 3% of revenue or an astonishing £18 billion. That, of course, does not include the costs to the tax payer in complying with the code, and even for an individual that can be several hundred pounds and for a company many thousands. We can see that the British taxation system is sucking tens of billions out of the productive economy. There is no added value in jobs enforcing tax compliance.

In Estonia, the simple tax code costs around 0.07% of revenue to collect and is so simple that 95% of people complete their tax return online. The burden on the economy is a fraction of that on UK.

There is a serious problem in the UK taxation system, but it is not that of corporate tax avoidance. The fact is that the current system has become so unwieldy as to be simply unenforceable. 

Fair taxes must start from the effective abolition of the current code and a return to a system based on Adam Smith's four principles of taxation: Equity, Certainty, Convenience and Efficiency. As the great man himself put it:

I. The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.

II. The tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person.

III. Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the contributor to pay it.

IV. Every tax ought to be contrived as both to take out and to keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the state.

Tax reform in the UK is now long overdue.

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