Wednesday, October 19, 2011

Time to overthrow the (tax) system

Yet another tax catastrophe is unveiled by the incompetents who control Her Majesty' Revenue and Customs service: over seven million people are paying the wrong level of tax. Though the story is reported as though it is a good thing that 4 million will get a repayment, the fact is the cost of fixing the problem will be in the millions.

The British taxation system is totally broken. As I have noted before, it is now 11,250 pages of mostly contradictory regulations. This is five times longer than the German tax code.

I is incredibly expensive to administer, and the costs of compliance- even a simple individual tax return often requires an accountant- are now running into tens of billions of Pounds, on top of an administration cost that is already around £ 20 billion every year.

This can not go on.

It is quite clear that simply tinkering with the system bequeathed by the OCD tinkerer, Gordon Brown will not get us anywhere. There most be a wholesale reform. Huge areas of tax must be eliminated, a simple, clear tax code is essential.

It shocks me that people in Britain are not out on the streets protesting at this shameful example of outrageous incompetence.


Mark Valladares said...


With the greatest respect, I have to disagree with you, as one of the 'incompetents' that work for HMRC. There is nothing complex about the system that accounts for simple failure to notify HMRC of personal circumstance changes. There is nothing complex about the fact that benefits in kind change, or people move, or take up multiple jobs, or move from employment to self employment and back without remembering to let us know.

572 employees were named as having the letter X as their surname in end of year returns last year, 40 were indicated as still working after their 200th birthday, and there are apparently 824 people with the surname 'Unknown' lurking among us. So, before you cast aspersions, the errors are two-way.

Rant over, you're right about the tax code - it is ludicrously over-complicated...

Cicero said...

Ok, fair point: it is not so much a question of the tax people as the tax system. I think it is impossible to administer in the current form.

Daniel said...

When I've been over-charged by HMRC it's been because stopping work part way through the year led to me not getting the full benefits of my tax allowance.

It's like Mark says, the problem was that they lacked information about me rather than an error due to a complex system.

All I had to do was give them a quick phone call to claim it back.

Newmania said...

Interesting post, you are on good form, its all good recently.

btw I see your beloved Estonia is experiencing a super-high rate of growth whilst pursuing eye watering austerity measures.Fancy

Alex Sabine said...

I agree with Cicero that our tax system has become ludicrously complex. It was bad enough 30-odd years ago, when Dick Taverne (sthen director of the Institute for Fiscal Studies) observed:

"For too long, tax reforms have been approached ad hoc, without regard to their effect on the evolution of the tax structure as a whole. As a result many parts of our system seem to lack a rational base. Conflicting objectives are pursued at random; and even particular objectives are pursued in contradictory ways."

Things improved strikingly in some respects during the 1980s due to Nigel Lawson's tax reforming efforts (notably to income tax, National Insurance, corporation tax and CGT). However, subsequent Tory and Labour Chancellors have not only undone his good work but created a maze of new reliefs, exemptions, privileges and so forth, most of which have spawned their own loopholes and perverse incentives.

Gordon Brown was clearly the worst offender, but this government hasn't grasped the nettle of tax reform yet, instead merely tinkering at the edges. Perhaps it feels - given that fundamental tax reforms invariably create losers as well as winners, and the losers always shout louder - that it has more than enough on its plate already without opening up a whole new area of controversy and potential coalition splits.

But given the economic costs imposed by our current system, and the fact that even a revenue-neutral set of tax reforms could provide a significant boost to growth, I believe leaving this on the back burner would be a mistake and a big missed opportunity.

Of course there are many different approaches to tax reform, and there is unlikely to be an easy consensus.

From my perspective the key thing is to approach it in a systematic way, so that changes to different facets of the system (eg personal and corporate taxation) are complementary. And the default approach should be one of 'neutrality', so that (with a small number of explicitly justified exceptions) the tax system treats similar economic activities in similar ways.

If these two rules of thumb were followed, the result would be a tax code that was not only much shorter and simpler, reducing compliance and administration costs, but also reduced the economic costs associated with the distortions to efficient resource allocation, and massively reduced opportunities to game the system, thereby reducing avoidance and evasion.

The IFS recently set out a comprehensive 'road map' to a simpler and better tax system in their Mirrlees review. While I don't necessarily think every proposal they make should be adopted, it is a very impressive piece of work full of useful suggestions. It would be nice to see the Treasury's Office of Tax Simplification live up to its name by engaging with it.

As Cicero says, meaningful tax reform will only come by ripping up the current discredited tax cod and applying some first principles; merely scrapping a few arcane or obsolete tax laws and tidying up the administration doesn't come close to what's required, because it doesn't deal with the problem at source.