We must ditch unfair loopholes – and then cut tax overall

BRITAIN’S corporation tax system is broken. It is arbitrary, opaque, incomprehensible and unfair. At best, it is uncompetitive compared with other countries, such as Ireland; at worst it is a complete nightmare of complications and distorted incentives. Britain’s tax system is one of the worst things about the UK: It needs to be smashed up and replaced by something entirely new.

Some streams of income from capital are taxed, taxed and taxed again, thanks to levies including income tax on dividends and capital gains tax, adding to a crippling total tax rate. Other streams of income are taxed far less, thanks to loopholes. This isn’t right or efficient. But you can’t have a tax system based on people voluntarily ignoring the law, which is what some of those MPs who have been specialising in permanent outrage about the tax system seem to believe. Their argument seems to be that there is nothing that they, merely being MPs and thus in charge of writing the law, can possibly do about it. Instead, this is a moral issue, they claim. This, of course, is nonsense, in practical terms at least.

Do you know anybody that voluntarily makes large donations to HMRC? Neither do I. So those who don’t like the status quo – I hate it so much I chaired the 2020 Tax Commission, which produced a 417-page report on the subject – need to explain how exactly they would change the law. If Vince Cable believes the current situation is “completely unacceptable tax abuse” as he put it yesterday, then his government needs to change the rules on the way companies are taxed – and no, that doesn’t mean slapping higher council tax on hard-working families, seemingly the answer to every question he is ever asked.

It is possible, as I do, to advocate much lower overall taxes while accepting that each and every bizarre loopholes needs to be ditched. Take Google and Amazon. Under EU rules the bulk of their operations are registered as taking place elsewhere, so they pay corporation tax overseas. This is legal, even though Amazon makes its money from dispatching goods from the UK to UK customers; and Google generates its revenues from UK advertisers targeting UK consumers. The solution, of course, is to tear up EU rules and ensure that all companies of this kind must run all their UK operations through UK subsidiaries. That way online firms would be on a level playing field with John Lewis and others based in the UK.

But it is important to remember that shutting loopholes is no free lunch. “Companies” are a legal fiction, a bundle of contracts. It is not they who will pay the additional tax as companies don’t pay any tax – logically and empirically, only the people that make up the firm do. Shareholders pick up part of the tab (they lose some income generated by their capital), employees another part (reducing the income from capital leads to less investment, reduced productivity growth and lower wages) and customers the remainder (higher taxes often lead to higher prices). So when people say they want to hike taxes on companies, they are actually advocating higher tax on investors, employees and online shoppers.

So yes, we need to get rid of the loopholes in the tax system to make sure that everybody is treated equally – but then we also need to slash taxes across the board, to boost competitiveness and to help investors, workers and consumers. That is the missing part of the tax jigsaw puzzle. The problem is not that taxes are too low – on average, they are too high. The problem is that they are unfair, opaque and complex. That must end.

allister.heath@cityam.com
Follow me on Twitter: @allisterheath

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April 22, 2014, 2:25pm