26 MAY 1967, Page 24

Beasts of the tax burden MONEY

NICHOLAS DAVENPORT

A discussion of taxation is like rehearsing your last operation—it is bound to bore your friends to death. But, unlike your last opera- tion, taxation cannot be dismissed. It is aching all the time and is, in fact, part of the British sickness. Excepting the French, the British tax system must be the most irritating and dis- abling in the world—the French, being adept at tax avoidance, can tolerate their tax ab- surdities more easily—and it has certainly become more exasperating since academic tax experts have been allowed to help shape our tax legislation. As someone has remarked, the greatest disservice the Labour government ever did to the cause of tax reform was ,to gag Dr Kaldor by making him a civil serialist. I can hardly wait to attend his lectures when he follows Dr Balogh's example and returns to academic life.

The latest pundit to join the tax dialogue is the young economic correspondent of The Times, Mr Peter Jay (son of Douglas), who is fresh from the Whitehall back rooms where so many of these tax absurdities are thought out. His tour de force last week on Britain's tax dilemma came to the doubtfully re- assuring conclusion that British taxation is lower and rising more slowly than mnst other European countries. (Our total of taxes—cen- tral and local—and social security contributions as a percentage of the gross national product rose to 34.2 per cent in 1965 against 39.6 per cent for Germany, 37.6 per cent for Holland, 39 per cent for Norway, 44.2 per cent for Sweden and 45.5 per cent for France.) Why, then, asks Mr Jay, do we persistently think of ourselves as an unusually highly taxed . country? The answer is simple. The tax levy is not fairly spread. The individual earner is singled out for discriminative treatment. The whole system is full of oddities and absuidities. We have a perfect right to moan and groan. Here are the chief moans which come from the overtaxed workers as much as from the over- taxed managers and entrepreneurs.

Before writing his erudite piece, did Mr Jay study the fascinating anonymous article. which appeared in his journal on 10 April froth four City tax experts? Over the past two years a City banker, an investment trust manager, a stockbroker and a tax consultant have been meeting regularly to discuss tax reform. This article summarised their views. They were not City reactionaries. They were not out to argue for lower taxation. We believe, they said that in some respects the rich are undertaxed—on capital. But they make the fundamental prac- tical point that income tax should be designed to combine fairness with the maximum incen- tive to work and to create. At the moment it doesn't As soon as the worker finds that tax is taking about a third of his overtime pay, which it does when his 'weekly pay exceeds £20, he will not go on working. As soon as the manager or scientist finds that tax is taking more than two thirds of his pay, tax avoidance 'becomes a major preoccupation, leadink to such by-products as the brain drain, compli- cated expense allowances or simply a dis- couragement to further effort.' The nation suffers. The national rate of economic growth slows down. Does Mr Jay really deny this?

If he will turn back the pages of The Times he will find a letter on 1 April from Mr Ronald Grierson. As Mr Grierson has accepted the DEA post of managing director of the IRC he cannot have any bias against the Labour. government. He writes: 'By far the biggest ob- stacle to the dynamic development of industry lies in the absurdly disincentive effect of present taxation levels on earned income.' Let Mr Jay turn back again to 20 December. He will find a letter from Professor Wheatcroft of the London School of Economics on the brain drain. He writes that the manager or scientist is well aware that 'any significant in- creases in his earnings [above £8,0001 will leave him with less and less after tax if he stays here.' (At £16,000 the marginal rate of tax for a married man with two children goes up to 18s 3d in the £.) Professor Wheatcroft sug- gests cutting the surtax rates on earned income to one half of the 1964-65 rates. Now a cut in surtax would not cost the revenue much money, for surtax brings in only a little over £200 million (against £3,000 million for in- come tax), but the most sensible reform would! . be to abolish surtax altogether and grade in- come tax rates up over a certain income until the highest rate leaves the top brackets with at least 66+ per cent. At the moment the highest marginal rates of tax leave only 9d in the £ and are an insult to the taxpayer. They imply, as The Times symposium pointed out, that it is immoral to earn so much money and that the state must therefore confiscate it. Yet the earners of these high incomes are probably doing far more to boost the national rate of economic growth than the whole lot of conventional managers put together. It these would,. be a disaster if they left ese shores. It would also be a disaster if their professional tax advisers refused any longer to cooperate with the Inland Revenue and went all out for the tax evasion common t8 most casual and over- time workers and self-employed small business- men. As the symposium added: 'Tax evasion is not yet respectable but it is not far from it.'

With a fairer system of personal income taxation the revenue might then proceed to a fairer system of personal capital taxation. The Times symposium suggested 1 per cent on per sonal wealth over a certain level in place of the capital gains tax (which is cumbersome, irrational, semi-voluntary and withal expensive to collect) and a gifts tax with legacy duties in place of estate duty. These are sensible pro- posals. The main object is to broaden the base of the tax structure so that personal income taxation can be reduced and healthy incentives restored.

It is really extraordinary that a Labour government, which increased total taxation from 32 per cent to 34.2 per cent of the gross national product, should have made it more difficult for the individual to save more out of his earnings and much easier for the com- pany to save more out of its corporate earn- ings. Company taxation having been reduced from 561 per cent (income tax and profits tax) to 40 per cent (corporation tax), the accumu- lation of corporate 'wealth has been fostered. That is fine for the capitalist But it is obvious that corporate tax is too low and income tax too high. This seems to have dawned on Mr Jay, who remarked: 'The t.nt is already a low labour-cost country chiefly because, corn. pared with other countries, we load so small a proportion of our taxes on to "employers." [He meant "companies."' Our taX system is in fact distorted to compensate for the fact that the money wages we pay ourselves are too high for our level of productivity at the present exchange value of the f.' This remark should lead to a really big family row.