Smarter choices on tax should be agreed on by all

THE debate between the Occupy movement and its City neighbours was never clarified, but essentially was about bigger or smaller government. Not surprisingly those receiving benefits but not paying tax want more of both, while those paying the bills want less. Close proximity sadly did little to diminish the caricatures of greedy banker and welfare scrounger, two extremes that have been exploited by politicians and others allowing outrage in both camps but no solution. The reality perhaps, to steal a quip from Samuel Johnson, is that there was never going to be an agreement between the protesters in their tents and the city workers in their glass and steel boxes in that they were always arguing from different premises.

Politicians are well aware of the notion that if you rob Peter to pay Paul you can always rely on the vote of Paul and this is partly behind the mess of benefits and reliefs that fund these grievances. As a first step to reducing some of these, and making society a little more harmonious, we might consider changing some of the incentives we have in place, many of them perverse. And if there is one thing we spend a lot of time looking at in financial markets, it is the effect of incentives on behaviour.

If we wanted a sign that taxes are too high, then the fact that the civil service is employing people as “consultants” and thus allowing them to pay themselves as small companies is pretty convincing. This is not illegal of course, though it sticks in the craw somewhat that many if not most of the left-leaning politicians, media and entertainment types calling for higher taxes on the rich avoid paying tax themselves in this way.

But why not extend this notion of the individual as a company to help with the unemployed? In particular the disincentive to go back to work produced by a loss of benefit and a sharp rise in income tax. The Liberal Democrats want to raise the tax threshold, but why not allow the existing annual threshold to be carried forward for up to five years and allow part of the tax loss to be used up in each year of new employment? Double the tax relief when it is most needed. While we are at it, why not allow tax thresholds within the family unit to be transferable, helping single-earner families?

There are many other ideas, but space for only one. Much has been talked about reducing tax relief on pension contributions, but, as pointed out in this paper, this produces double taxation and continues the perverse disincentive to do a good thing, which is to save. One radical, yet simple, solution would be to acknowledge that income tax and national insurance (NI) are both taxes on labour and thus combine them, lifting the upper limit on NI, but at the same time reducing the higher rates of tax so that the total amount paid is the same. Thus with 12 per cent NI, the 40 per cent rate drops to 28 per cent and the 50 per cent rate to 38 per cent. Tax relief on pension contributions would drop, but then so would the subsequent tax take on the pension. It would of course also reduce the incentive to be a “consultant”.

Mark Tinker is a global fund manager at Axa. The opinions expressed in this article are those of the author.