Google row shows pressing need for tax simplification

 
Rory Meakin
THE Public Accounts Committee offered about as much to the debate on tax avoidance yesterday as a hot air balloon offers transport. No clear direction, not a lot of movement, but a lot of hot air.

Instead of a critical dissection of how the system works, and an examination of what might be done to fix any problems, the committee’s chair Margaret Hodge railed angrily against companies like Google operating under the law as it stands, rather than by using her understanding of “common sense”. That’s no substitute for the serious reform we need if we want a tax code that’s fit for purpose.

In some ways, embarrassing confusion about how taxes actually work is understandable. Our code is so complex and so long (over 17,000 pages) that it’s impossible for anyone to understand the whole tax system. We need a much simpler system that targets income to ensure that everyone pays their fair share.

But we must also accept that corporation tax is fundamentally flawed. It’s morally unfair, economically destructive and politically corrosive.

It’s unfair because the burden ultimately falls on shareholders and workers in profitable companies, irrespective of how well-off they are personally. Economic evidence shows that the bulk of the burden of corporation tax falls on workers in the form of lower wages. And workers don’t get a personal allowance from corporation tax. The poorest are not spared.

It’s economically destructive because it punishes successful firms and hits their investment plans. And it’s politically corrosive because all the desperate exemptions and allowances designed to limit the damage it does to sensitive areas of the economy lead to confusion and a breakdown of public confidence in the whole system.

But things could be different. In May last year, the 2020 Tax Commission published its report into the tax system and proposed a comprehensive programme of reform aimed at delivering a radically simpler replacement. Instead of a raft of separate taxes on the same income – corporation tax, capital gains tax, employee’s and employer’s national insurance and all the various rates and types of income tax – there would be a single income tax, with a single set of rules, charged at a single rate of 30 per cent, applied to all income whatever its source.

That simplicity would mean that it would be clear how much tax everyone should be paying. Above a generous personal allowance, those who earned twice as much should pay twice as much. It wouldn’t involve hard-to-understand taxes that lower the wages of the poorest without them realising. After all, few realise that once employee’s and employer’s national insurance are accounted for, the true basic rate is really 40, not 20 per cent. It wouldn’t tax profits held by companies for investment the economy desperately needs. And it wouldn’t punish companies just because they use fewer resources than their competitors to create the same amount of value.

Politicians complaining about companies abiding by laws that politicians wrote doesn’t help anybody. They have the power to rewrite tax laws. They should get on and do it.

Rory Meakin is head of tax policy at the TaxPayers’ Alliance.