To make tax simple, low and compulsory, get at it with the heavy roller
It is all the fault of the fairy who came, uninvited, to Gordon Brown’s christening. Beside the scowling infant’s Moses basket, his godparents’ gifts of industry and ambition were assembled when this glittering creature approached him with a parcel of her own. ‘See, little man,’ she told him, ‘I’ve brought you the great gift of simplification.’ Then she curtsied, and presented it to him, upside down. After that, he grew up to be Chancellor and opened the parcel. Once in a generation, he announced, came the moment for a fundamental reform of the tax system. He set about it in his own way or, rather, in the fairy’s way. His Finance Bills grew longer and longer, like Pinocchio’s nose. He discovered that the system could be made to work in both directions, extruding money as well as sucking it in. If the result was rather less than clean and tidy, further refinements might be needed, but he could never accept that complexity was a fault in itself, or that what looked straightforward from his seat at the control panel could look different from the other end. Of late the machine has been puffing out vouchers — his christening present for every child — but nobody seems to be picking them up. No matter. In the Treasury, rebuilt, refurbished and expanded, the tax collectors have been brought together and installed in the south quadrangle. It was easy to guess that within those frowning walls, a flat tax would be written off as too simple by half.
Wind of change
Outside the walls, this idea has caught the wind, now blowing in a westerly direction across Europe. Tax is levied at a single flat percentage rate on everybody’s income above a certain level, and below that, income is tax free. No concessions, no incentives, no allowances, no wizard wheezes. Tax accountants find their occupation gone. The Baltic States have had flat taxes for a decade. Russia has one, Poland means to have one. Greece is working on one. Angela Merkel, who hopes that Germany’s voters will put her in command of their country’s labouring economy, is taking advice from a specialist in flat taxation. He will prescribe it as a stimulant. Doing the sums for the Adam Smith Institute, Richard Teather calculates that Britain could go over to a flat tax at a rate of 22 per cent, with the first £12,000 of income left out of account. It was Adam Smith himself who said that vexation was as bad as an extra tax. By that test a flat tax comes out well.
Time and the Treasury
This is not a test that the Treasury cares to apply. Its line — winkled out from its files with some assistance from the Freedom of Information Act — is that such simple systems may do well enough in the Wild East, but not in a grown-up economy like ours, where people have got used to the idea of paying taxes. Its mandarins accept that tax cuts can lead in a virtuous circle to economic growth and thus to higher revenues, but they opted to leave that bit out. They are temperamentally unwilling to wait for the circle to come round. Just at the moment the Treasury does not have any revenue to spare, and had to fudge its fiscal rules to stay within them. Even on Mr Teather’s reckoning, an extra £50 billion or so of revenue would have to come from somewhere. Mandarins can always fall back on the Principle of Unripe Time, which teaches them not to do at any particular moment what they think to be right at that moment, because the moment when they think it right has not yet arrived.
Lawson’s Law
It was not obviously right when Nigel Lawson set to work, but he did not let that stop him. In his first budget he flattened corporation tax, knocking over any number of concessions and allowances and bringing the rate down by one third, from 52 to 35 per cent. He made a virtue of abolishing a tax in every budget, but brought his budgets into balance and then into surplus. The top rates of direct tax are still where he left them. Lawson’s law of taxes is attributed to him: make them low, make them simple, make them compulsory. Keeping them simple and low renders them easier to collect and involves far less vexation all round.
Through the bocage
An incoming Chancellor with a heavy roller need not limit his activities to income tax. He should remind himself that last year’s tax incentive is this year’s break and next year’s loophole. He should turn his attention to the three different regimes for Value Added Tax, which fail all three tests of Lawson’s Law. At 171/2 per cent it is high enough to set your plumber asking: ‘Is this a cash job, guv?’ He is still not used to paying taxes. Among this year’s new MPs, Douglas Carswell distinguished himself by suggesting that VAT should be abolished, and, with it, the subsidies paid by central government to local government. The two sums would balance one another out, and the town halls could finance themselves by local sales taxes. The central tangle of personal taxation requires not so much a roller as a Rhino tank, devised to penetrate the Normandy bocage. Here income tax, National Insurance and benefits all intertwine. Here a crop of credits, sown by the present Chancellor, grows up to make the thicket thicker.
A kinder fairy
Any Chancellor bold enough to take it on must realise that reform implies redistribution, which is better tackled with some cash in hand. Otherwise, the winners will be mildly pleased and the losers will be furious. Even with a flat tax, someone’s tax bill will go up. In the end, the pressure of competition may press reform on us. So far, we have been able to pass our economy off as lowly taxed by European standards — if we ignore such marginal purchases as petrol at the pumps and whisky. If reform were to catch the wind in Europe, we might be hard-pressed to turn it around at the Channel. That would give no pleasure to a Chancellor whose revenues are always falling short of his aspirations, and whose instincts always lead him towards complication and control. A Chancellor who believed that taxes should be low and simple and compulsory would need different instincts and, of course, a kinder fairy at his christening.
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