Changes to the tax code should be driven by the broader theme of simplification


THE loudest pre-Budget negotiations this year have been over changes to the tax system. Broadly, the Conservatives and Liberal Democrats have been having public disagreements over which taxes to cut – removing the temporary 50p rate for high earners and/or raising the personal allowance threshold to £10,000 – and how to pay for these cuts – a “tycoon tax”, a “mansion tax”, squeezing pensions relief for high earners, or lowering the top rate income tax threshold.

The problem with this public discussion of tax policy, and regardless of the rights and wrongs of cutting taxes for the rich or the poor, is that it doesn’t do much for the overall health of the tax system. A healthy tax system is a holistic tax system. It’s one that’s not created by bolting different ideas on to one another, but by setting an overall vision and making sure everything points in the same direction with as little overlap or contradiction as possible. That some of the very different proposals for new taxes come from influential figures in the same party – the mansion tax is a Vince Cable favourite and was in the 2010 Liberal Democrat manifesto, the tycoon tax is a Nick Clegg proposal from earlier this month – does not point towards a coherent, considered tax policy.

Making tax policy in this way, with a focus on the headlines, only ever ends up creating kinks in the tax system: big loopholes, strange “cliff-edge” problems or general confusion. The probably soon-to-be-ex-50p rate of tax was another tax change with more of an eye on the headlines than practicalities.

The tycoon tax proposed by Nick Clegg might have the aim of limiting tax avoidance by ensuring the richest pay a minimum amount of tax, but it sits at odds with the rest of the tax system. If current tax legislation is creating avoidance loopholes, why not close those loopholes rather than create a new law that contradicts existing legislation? Indeed, a general anti-avoidance rule (GAAR) is probably going to be part of the Budget anyway. Such a rule has its own problems, but it’s preferable to well-meaning but impractical alternatives.

The coalition has generally had quite a good record on tax so far, behaving with transparency and setting up the Office of Tax Simplification. But its good intentions haven’t translated into concerted action yet. We might see an announcement on personal statements for taxpayers and another nod towards merging national insurance and income tax, but the government shouldn’t dilute the impact of positive, transparent moves like these with further complications elsewhere.