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Tax Simplifier 36: Tax simplification - why and how

    The 'Tax Simplifier' series aims to make the case for a much simpler tax code with practical recommendations for policy change. This is the final blog in the series. Read David's previous blog on the economic benefits of tax simplification. You can follow David on Twitter @TaxSimplifier.

    The previous Blog addressed the economic benefits of reform. But what other objectives do we have?

    We want stability. Firm foundations are needed - in the tax world this means that we must have a clearly defined tax base, (not the current segregation of income, gains and allowances into various categories with further rules for their reaggregation). We should refocus on the economic effects of what people do, and levy tax accordingly. 

    This would enable transparency - tax law would become much less rule based and much more accessible to those affected by it.

    And we want greater neutrality, so that where two similar taxpayers achieve similar commercial results by different means (for example conducting business through a company or as an individual trader) they have similar tax bills.

    And we want the tax code to be fair and to prevent unacceptable avoidance - a difficult objective, but a task made nigh impossible by the obscurity of what we have now.

    In summary we want a reformed tax system which is fit for purpose in the modern world.

    The following steps are proposed:-

    1. A re-write of tax law for business, securely based on the economic results of the business, not on a hotchpotch of tax rules. This means using accounts as a starting point, although strict accounting requirements could safely be relaxed in the case of small businesses.

    2. A principled review of how dividends should be taxed. It would undoubtedly be the simplest and most logical solution to treat dividends in the same way as interest, but costings, in particular for tax exempt and overseas shareholders would be needed. Ensuring compliance with EU law would need to be addressed in detail.

    3. A review (more far reaching than that conducted by the Office of Tax Simplification) of current reliefs and exemptions.

    4. In the light of 1-3 above, a review of anti-avoidance legislation. The current approach, based on an arms race of increasing complexity between HMRC and the avoidance industry has not succeeded. Indeed over-detailed anti-avoidance rules, which negate a clear sense of purpose, can serve as an attractive challenge to tax advisers to find a way round them.

    5. Merge income tax and national insurance contributions.

    6. Reconsider capital gains tax and its relation to income tax. Earlier Blogs have proposed that these two taxes should be integrated better. But lower effective CGT rates will be justified to encourage savings and investment.

    7. Review VAT zero rating and exemptions - many VAT distinctions have no logic behind them. The VAT base is narrow in the UK compared with most of Europe - about £23bn extra would be collected if all zero rating were abolished. Reduced income tax and increased benefits would compensate for VAT increases. It would not politically easy to achieve this, but do we want to saddle future generations for ever with the absurdities and distortions of the current rules?

    8. Look at other taxes as well - there might some quick fixes, such as the current absurd method of charging  higher rates of stamp duty where the price paid exceeds a threshold. There are anomalies with inheritance tax. Employee benefits and exemptions need tidying up. Green taxes have gone over the top.

    President Reagan said in his State of the Union Address of 1985, in anticipation of the US Tax Reform Act of 1986, “Tax simplification will be a giant step toward unleashing the tremendous pent up power of our economy”.

    Hear hear! It would be true in the UK as well.

    The two ministers who are perhaps thought of as making the most progress at present are Iain Duncan Smith and Michael Gove - they dare to be ambitious in their fields of benefit and education reform.

    So are we willing to do something ambitious about tax? Is it accepted that substantial reform might be very attractive, and also possible? If not, what are the reasons for thinking so? Otherwise Government should give proper consideration to reform, or of course it will not happen.

    David Martin enjoyed a career spanning 23 years as a tax lawyer within a large City Law Firm, latterly as Head of the Tax Department, before taking early retirement in 2002. During that time he advised both company and individual clients. He now lives a less pressurised life in Devon with his wife and two daughters and maintains an active interest in tax law.

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