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Jonathan Clark was a Fellow of Peterhouse; at Oxford, he was a Fellow of All Souls College; latterly he has been Visiting Professor at the Committee on Social Thought at Chicago, and Hall Distinguished Professor of British History at the University of Kansas. His latest book is a study of Thomas Paine.

Like it or not, referenda settle things. Brexit will happen, with one set of small print or another. It is time to move on, to contemplate the revitalised society that might, and should, emerge after independence is regained.

Leave or Remain, there are similar challenges ahead. The crisis of 2008-9 led successive Chancellors to double the national debt. Interest rates are edging up, making the cost of servicing that debt ever higher. Productivity has languished, confining the UK’s growth rate to about 1.5 per cent per annum. compared with its previous postwar average closer to 2.5 per cent.

Many things might be done to boost this growth figure, but a systemic reform of the tax system deserves consideration. After Brexit, the UK recovers its financial freedom. A major opportunity would be lost if we did not reconsider taxation across the board.

To be accepted and effective, a tax regime must be moderate, rational, simple, and fair. The UK’s seldom meets these criteria. It is, rather, an over-ingenious Heath Robinson contraption, held together with string and sticking plaster, handicapping this, burdening that, and rightly resented. It has grown up over a millennium, changing by piecemeal adjustment. We no longer tax hair powder, servants, or windows. But we do tax important things in ways that have seriously negative side effects.

It is common ground that taxation disincentivises that on which it is levied. This is ultimately unavoidable; but this negative impact can be mitigated. Consider the analogous impact of three existing taxes: business rates, VAT and Corporation Tax.

Business rates disincentivise the occupation of physical premises. Yet the great majority of small and medium sized businesses, especially start-ups, necessarily need premises of some sort. Valuing these premises for taxation purposes is difficult, costly, politically unpopular, often delayed, and often disruptive in its impact when it finally happens. The assessment is still based on guesswork as to fair rental value, a practice rightly abolished for domestic rates in 1990; exemptions and reliefs add to uncertainties.

Value Added Tax began in 1973 as an imposed consequence of EEC entry, and is now of great complexity. It is ostensibly a tax on consumer expenditure, yet it also disincentivizes the addition of value by firms that supply the consumers. This addition of value is merely a synonym for growth. Adding value is exactly what consumers ought to want their economy to do.

Corporation Tax is even more complex. It takes from the haves, but also disincentivises their making of profit. Recently, governments have reduced its rate, seeking to make the UK internationally competitive in this respect. Even as reduced, this tax is still aimed against ‘profit’. Yet this concept, which sounds simple, is an accounting construct, not a constant that we can tax without negative consequences.

In the post-Brexit springtime, it will be worth considering what would happen if all three were abolished and replaced by a single Turnover Tax, set to be revenue neutral, raising about the same total as business rates, VAT and Corporation Tax combined. (Another system would be required for market-makers in, for example, foreign exchange, where turnovers are high but margins narrow.)

The EU has recently floated an idea for a turnover tax, but as an additional impost, part of an envy-war against American internet firms. We might, instead, make it the means of widespread tax simplification. Simplicity would mean savings for firms no longer spending small fortunes on legal and accountancy advice. There would also be significant productivity gains.

First, the playing field would be levelled between businesses needing physical premises and those trading mostly online. Online businesses are growing exponentially, but escape (legally but, say many, unethically) paying their fair share in tax. Taxing them equally would satisfy the criterion of fairness.

Second, the taxation of companies on the value they add disincentivises high productivity and incentivises their decline into zombie companies with low profit or growth. A single Turnover Tax would give those zombies a gentle push in the direction of innovation.

Third, Corporation Tax promotes similar lethargy. If companies were free to make untaxed profit, the same automatic incentive to productivity growth would operate.

The result would be to reward the most dynamic firms and to incentivise inward relocation by the most successful overseas companies.

There would be related implications. If business rates were abolished, it is hard to see how the local taxation of domestic property could fairly be continued. Council Tax (a minefield of guesses as to capital values), and stamp duty on house purchase (a barrier to labour mobility) could be abolished.

Both supporters and opponents of Margaret Thatcher’s Community Charge had a point. Houses do not use local government services: individuals do. On the other hand, investors in housing saw their properties increase steadily in value over time, paying much more modest taxes on their gains from their houses than they would have done on other investments.

Council Tax and stamp duty on property might therefore be replaced by capital gains tax, levied at equal rates on houses and on all other investments. This would have the advantage of being payable only when houses, like shares, were sold, and would not bear annually on the property-rich but cash-poor. Such reforms would tilt the balance away from rentiers towards the industrious and the successful, but hardly to the point of revolution.

Second, a levelling of the playing field suggests that individuals’ income from employment, profit, capital gains and dividends should be taxed at the same rates, levied on everyone’s single annual income stream.

Third, a simple tax system, set at modest rates across the board in this way, might permit the abolition of a wide range of arbitrary minor taxes, like that on share purchase (which disincentivises investment) and on cars and fuel (which disincentivise economic mobility).

Some politicians continue to demand continuity after Brexit (that is, a minimum of change). But we might ask: what is the use of regained freedom unless it is exercised?

63 comments for: Jonathan Clark: How should we reform our tax system after Brexit?

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