GOVERNMENT FUNDING

Taxation will be simplified and thus cost less to administer and to police avoidance.

All Quangos and Government Agencies must be ordered to produce a cost/benefit analysis of their work and achievements. 

Charities would largely take over Overseas Aid.

Then there are “Efficiency Savings”.  I would have a Cabinet Minister in charge that seeing that these savings are real.

The statistics below are worth reviewing and acting upon as I do in Section 7.

 

 

  

GOVERNMENTS NEED  

Central and Local Government’s need money to cover the spending that the majority of their citizens wish them to cover.  So all Governments need money, but a fundamental principle, espoused by Adam Smith, is that Taxation should NOT distort the natural market.  The best everyday example of this distortion is that taxes on the car are a revenue earner, yet bus and rail transport costs the taxpayer money for every journey.  Our life and national economy is not improved by such distortions?  Ideally taxation should be a way for governments to raise the most money with the least distortion of economic activity.  (The Economist www.economist.com 2 May 2009).

Taxation can be used as a powerful weapon to change the way people behave.  Such as harmful activities, smoking, excessive alcohol or other drug abuse.  Powerful arguments can be used to support this use of taxes. 

I make the following claims:-

  • To sustain a progressive improvement to our material well being.
  • This document is a non-partisan policy suggestion for a tax regime that will sustain growth and have public endorsement.
  • It sustains growth because it recognises the issues needed to sustain the environment and still increase the standard of living year on year.
  • It commands public support because it does the above and is clear and fair to the vast majority of society.

TAXATION PRINCIPLES

I have some guiding principles:-·         

  • Taxes should not distort the market indefinitely
  • Complex taxes encourage avoidance and expensive collection and policing activities, so make the rules of all taxes, simple and clear, minimise deductible allowances and so pass the administrative burden on to the taxpayer or their agents as far as possible
  • Levy’s are a form of corporate taxation.  They are done to encourage something, such as training.  It is better to make the company prove it trained employees for some relief of tax then most of the administration falls on the company.
  • Poll taxes such as the TV Licence fee and Winter Fuel Allowance need to be abolished.  The latter made part of the Universal Credit to those who need it.
  • There are constraints. 
  • I favour that the total tax take for individuals should not exceed 40% of GDP. 
  • Also that Governments should only borrow to cover expenditure on infrastructure and even then keep it under control so that the interest costs can be contained within the 40% limit of normal expenditure.
  • Make the journey to work tax deductible at the cost of public transport.
  • Above all taxation and benefits should be designed to encourage work, saving and investment, so encouraging the growth in opportunity and the economy.  To my mind "rebalancing the economy" means getting more into Manufacture and the route to that is through better Design.  But that is another of my favourite topics.

There are six main forms of taxation.-

  • ·         Business
  • ·         Purchase/Sales Tax
  • ·         Income
  • ·         Property
  • ·         Wealth
  • ·         Trade Tariffs

Now let us consider some of the pros and cons of each of these taxation sources.

Business

The main business tax is Corporation Tax.  This varies with political wills or whims.  But we are generally competitive with out competitors in the developed world.  Our failure is in Productivity and no-one seems to have answers here.  I would commission all relevant professional bodies to look at this and come up with suggested answers.

There are also Business Rates, but these should revert to the local authority on which the business property stands and would become theirs to regulate to meet their local plans.

There are also licences and levies and although they need to be justified they are a marginal cost to business and the citizenry.  In principle though I against levies as I comment upon in the Government Taxation section of this report.

Purchase/Sales Tax

Spending must be taxed, a tax on consumption.  Now it is VAT, but it used to be called Purchase tax and Sales Tax is a common term internationally.  We should use this mechanism to restrain consumption. 

So sales taxes, VAT, or whatever it may be called is generally good for the environment as it discourages consumption which generates pollution, through waste and the energy used in production.  But consumption taxes are the hardest on the poor.  A solution to this is not raise any taxes on the basics in the Cost of Living Index, such as food and children’s clothing.  It has some relationship to wartime rationing, when it is said the nation as a whole was at its healthiest.  But if the item is a luxury or has to be imported over a great distance, then the rate should escalate.

VAT would be used to reduce consumption over time, what could be greener than that!  People would be made fully aware that spending taxes would rise progressively so even if there is deflation buying now will be cheaper than in the following year.

As examples the Sales Tax on most foods would be zero.  There may be exceptions on expensive, scarce items or foods that travel long distances.  E.g.  10% from Europe and 15% from the rest of the world.  Luxury items could be 25% or more.

Cars could be taxed on a sliding scale up to 25% or more for a town-based 4x4 off-roader.  However, in general I am against complex road pricing policies, believing that transport should be a level playing field.  The level of tax on fuel automatically compensates for distance travelled and the level of congestion encountered because of the time chosen for the journey and we can have added levy to cover the costs of accidents and the green impacts.  The fuel tax could be engineered to recover the Road Tax and basic Third Party insurance.  Leaving only Fully Comprehensive as a voluntary add-on.

The Sales Tax would also be used to squeeze out the black economy.  It would be a legal requirement on the populace to get a receipt showing that tax had been paid on goods and services (It so in Italy, even if it is still ineffective in the south) and the buyer would be liable if they have no valid receipt.  Builders, painters, decorators often operate cash in hand.  Local Planning officers could inspect the receipts when checking the compliance of the more home improvements to Building Regulations.  Surplus VAT officers would quickly establish the profiles of service companies prone to the cash-in-hand payment methods.  A further step to squeeze the black economy would be to greatly increase the registration of all trades.  A continuum of registration from the very specific of home plumbing and joinery skills to the general requirements for Chartered Engineers.  The GDP would immediately increase by 10%.

Whilst in favour of free trade, the UK would likely be alone in placing a greater reliance Spending Taxes.

Income Tax

With a higher burden of the tax take coming from consumption (sales) taxes, the income tax structure will need sensitive and progressive reform to compensate and protect those hit hardest.

Income tax should be gradually reduced by phasing more and more people out of the lower tax bands.  Far fewer allowances would apply.  This reduces the resources spent on avoidance and collection – costs that are a waste.

Taxes should be progressive and not have any distorting step changes.  Perhaps a start at 10% going up by 5% with every £10,000 and upwards until the budget balances.  Will there be a 100% tax rate?  No, 70% is above the often talked about 50% rate and that would be the maximum for what are the very few who have other means of securing their future.  There must be a generous personal allowance, say equal to the maximum possible benefit, so that work always pays more than living on benefits.  Each family member will be taxed in his/her own right.

NI payments would cease and PAYE would have to pick up that extra revenue.  NI is stepped and biased in favour of the rich whereas the new Income Tax would be progressive.

Reduction of income based taxes would support the elimination of the Poverty Trap.  A simplification of the Benefits system is long overdue.  More targeting but not cuts except to those who are cheating.

Investment Income

We do want to encourage people to save for their old age or a rainy day.  So assuming income tax has been paid and an individual or family has surplus cash let them invest it without further tax, more or less as they can for pensions.  So whilst income from savings is not taxed.  If there is a capital gain or loss then that is to the benefit or sorrow of the investor.

Personal saving, especially long term and for pensions must be encouraged with legitimate pension deduction in work being free of tax

Expand ISAs – take away any limit, in effect this will create a marked difference between money put away for the longer term and a short-term savings “buffer” for the proverbial rainy day.

Wealth in Life

Let us assume people have paid their taxes.  There is still without doubt, a disparity of wealth in this, as in any other country whether developed or under-developed. 

Redistributive taxes in life are wrong.  Breaking up wealth is bad for investment in the economy.  What is important is Equality of Opportunity and not Equality of Wealth. 

Suppose we could redistribute wealth what would happen?

First what do we mean by wealth.  If it includes non-cash assets then property would have to be sold, there would be a break-up of land and a consequent demand for developments in the previously green and pleasant lands, art and jewellery would be sold to the highest bidder, probably from overseas and pension pots destroyed causing chaos in the Stock Exchange.  The luxury end of the market would collapse so some of those people would have had their wealth taken off them and now their income stream destroyed.  The net effect would be a respectable 5 figure handout to everyone at enormous administrative expense.  Then there would be a boom in holidays, with rapidly rising prices and richest of the state would become travel agents and hoteliers.  In short the share out would not be enough to really change lives for the good in the long-term. 

But through Equality of Opportunity, everyone should have the opportunity by hard work and ability to become rich, even very rich.