IT is time for Britain to make a vital choice. Our economy is stagnant, with unemployment at horrendous levels, crippled by excessive public spending and a punitive tax system. There are two options. We can either tweak the status quo – try to keep a lid on spending, reform bits of the public sector and hope for the best. Such a soft option may stave off an immediate budgetary crisis but it will condemn Britain to permanent relative decline. Or we can change course: reduce public spending as a share of GDP more significantly, adopt an entirely new tax system fit for the 21st Century and establish the UK as a global trading hub, generating renewed prosperity for all those who live and work here. Today’s final report from the 2020 Tax Commission, which I chaired over the past 18 months, is firmly in this second camp: the old order is broken and needs radical reform.
Some of the report’s findings are summarised on page 3 opposite and also on page 22. The commission – convened jointly by the TaxPayers’ Alliance and the Institute of Directors – proposes abolishing eight existing taxes – and replacing them with a Single Income Tax of 30 per cent on both labour income (wages, bonuses and other earnings from the jobs market) and capital income (dividends and share buybacks, interest and rent). The shake-up, to be phased in over eight years, seeks to provide a plan A+ for growth and job creation and to ensure a simpler, more transparent and fairer tax code. The proposals suggest cutting some transport taxes – but leave VAT and other consumption taxes untouched. Public spending would fall further from 39 per cent of GDP in 2016-17, when the chancellor’s plans end, to 33 per cent by 2020 or thereabouts.
The aim is to identify all streams of income and make sure they are taxed once at a single rate, avoiding loopholes. This would apply to income from labour as well as from capital. To make sure the poor benefit directly, the report proposes a very large personal allowance of £10,000 in today’s money, a threshold which would be substantially higher by 2020. This retains a strong element of progressivity, with those earning £25,000 paying a far smaller percentage of their total income than someone on £250,000. But the elimination of punitive tax rates would do wonders for incentives and for the economy’s competitiveness. All income groups would gain: 30 per cent is lower than what even low earners pay today when national insurance is included.
At the moment, a pound earned by a worker is taxed and tripled taxed: there is income tax, national insurance (of two different kinds) and then more tax when – for example – the worker buys a house (stamp duty) or when she dies (inheritance tax). Other taxes masquerade as taxes on business – even though “companies” don’t pay taxes any more than TV sets pay the licence fee. The owners of capital and those entitled to its fruits – shareholders principally – are the ones who end up paying; such taxes are also partly paid for by workers in the form of lower wages. It makes more sense to tax the beneficiaries directly – hence why we would replace existing flawed and loophole-ridden “business” taxes such as corporation tax and capital gains tax by a single, unavoidable 30 per cent tax on all distributed income from capital. Existing avoidance schemes – such as using debt interest to reduce taxable profit – would be swept away. The report is available at www.2020tax.org – at 417 pages, it is hefty, but I recommend it to all readers who are interested in an evidence-based case for lower and better taxes.
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