Government is a game of two halves—the spending half and the taxing half. If the latter isn’t pretty much as big as the former then in the long run we’ll be in trouble. To fund all the schools and hospitals, police and armed forces, roads and pensions, we pay more than £600bn in tax each year. That’s about £4 in every £10 generated by the economy.
The tax half really ought to get as much attention from policymakers, parliament and the public as the spending half. If you are going to take that much money from people and businesses, you are going to have quite an effect on their incomes, their behaviour and their welfare. But tax is different. While other bits of government have strategy papers, white papers and green papers by the bucketful, no recent government has set out a proper tax strategy. And in parliament there isn’t even a select committee focused specifically on tax. The political debate seems limited to worrying about one or two headline tax rates, or an individual or company making use of some ferociously complicated avoidance scheme.
Partly as a result we have ended up with a jumble of inconsistencies, complexities and downright inequities which are hard to square with any coherent set of objectives. Indeed these are often the complexities and inconsistencies which allow tax avoidance schemes to take root in the first place.
Depressingly things are, on the whole, not getting any better. The problems don’t just relate to historical baggage. Many have been actively created or knowingly allowed to occur by this government and its predecessor. If that seems too pessimistic just consider some of the ways the system works at present.
We have two entirely separate taxes on earnings
We hear a lot about income tax, but rather less about national insurance (NI) contributions, which bring over £100bn a year into the Treasury coffers and are nothing more than a second tax on earnings. NI is charged on a different definition of earnings to that used for assessing income tax, adding complexity and creating a big and wholly unnecessary cost for business and HMRC.
Governments are delighted to exploit our collective lack of focus on NI. While income tax rates have fallen time and again, NI rates have risen. Why? Because that is what governments feel…