Why bashing the wealthy will not raise tax revenue

IT’S a curious state of affairs when tax is wielded as a stick with which to beat the affluent. Whether it’s capping tax reliefs, limiting pension contributions or increasing stamp duty to 7 per cent for £2m homes, it is noticeable that the constant stream of new tax measures is no longer about raising revenue, but seems to be an opportunity to punish the rich. This is surely not the way to support entrepreneurial endeavours, realise ambitions and drive growth in the economy.

While there has been much vocal and sometimes hysterical debate about tax avoidance and tax evasion, and the frequent blurring of the two, there is no doubt that the scale of the problem is far less than the hot air that surrounds it. To put it into context, last year HMRC collected £474bn in tax. The tax gap, the difference between what is owed and what is collected, is about £35bn.

Tax avoidance, as opposed to evasion, accounts for about 14 per cent of that gap, or £5bn. This figure is probably among the lowest in the world, because contrary to the more inflamed claims, the vast majority of wealthy people pay their dues. That is evident from the fact that according to Oriel Securities the top one per cent of individuals pay around 24.2 per cent of all income tax – a percentage that has been rising, not falling as some suggest.

But the tax system is now too complicated and inefficient. A large number of the difficulties surrounding tax planning have stemmed from the combination of relatively high rates of tax and the uncertainty created by constant changes in the law. It is generally accepted that raising tax rates for high earners will not raise more tax, and that the 50 per cent rate appears not to have brought in any extra revenue.

Tinkering with high headline rates of tax – while hiding tax increases and creating more bureaucracy – is not an effective way to increase the net tax take. It may well allow politicians to claim that they are “clamping down” on the wealthy but the economics makes no sense and the sentiment is extremely negative.

The answer is clear: genuine simplification. We need a much less complex system, with tax and national insurance streamlined at a sensible rate. This would be far more effective than capping or reducing tax reliefs.

Bureaucracy, too, could be minimised if all tax collection, from income tax to council tax to VAT, was under the control of a single centre. This would bring huge efficiencies, vastly increase revenue, cut costs and make it more difficult to avoid paying exactly the tax that is due. It would also help HMRC to rationalise their own processes and ensure the bills are correct.

Making tax collection straightforward is surely a far better way for the government to fill its coffers than deterring wealth creators, or worse still, driving them abroad.

Geraint Jones is a private client partner at Reeves.