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Let's Make The Tax System Less Taxing

08/03/2017 12:18
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Our tax code is too long and far too complex. Since 1997 the total volume of tax regulations has more than trebled, to over 21,000 pages. The vast majority of that new red tape was created when Gordon Brown was Chancellor, but it continued to grow under George Osborne.

The result is one of the most complex tax codes in the world. That's bad for the economy, because it adds needless costs for business, but it's also bad for generating tax revenues, because it increases the opportunity for tax evasion, whilst making the cost of policing the whole system more expensive.

There is a better way. A simpler tax system is easier to comply with, cutting costs for business and saving millions of taxpayers valuable time.

Simple tax systems are also easier to police, as both the motivation and opportunity to evade tax are sharply reduced. Every time a new regulation is imposed it creates another potential loophole. So why not just remove the opportunity? Indeed, Lord Lawson's tax simplification in the 1980s actually resulted in rising tax revenues.

So simplifying the tax laws is good for economy, reduces the opportunity for tax evasion and is a more efficient way to generate the tax revenue we need. It's also the best answer to Labour's gesture politics of forcing some taxpayers to publish their tax returns.

So what needs to happen? Philip Hammond has announced that in future there will be one budget statement a year. He is also clearly a sceptic about generating lots of little eye-catching initiatives. He's right on both counts.

But what more should be done?

First, end the recent habit of retrospective tax regulations. Trying to impose rules retrospectively on people and companies for past arrangements is unfair, hideously complex and costly to police.

Second, allow the Office of Tax Simplification (OTS) to review each tax from scratch. To date too many reforms have been incremental and yielded too few real benefits, either in cutting red tape, or in making tax collection efficient. Allow the OTS a freer hand to completely overhaul a tax. They might even propose to scrap some which are costly to collect or merge others.

VAT - our sales tax - would be a good start. After all any tax that needs the High Court to determine what is a cake and what is a biscuit, all for tax purposes, needs re-thinking. I'd put business rates and inheritance tax on the list, as well.

Third, be ready to be innovative about corporate taxes. Our current system dates back to the 1920s, in charging companies based on where they produce their goods. Nearly a hundred years on, this system is ill suited to a global market where companies can shift money made, around the world.

Some people, notably in the USA, are proposing we tax companies based on where their goods are sold, not where they're produced. Called a destination-based cash-flow tax it would prove far harder for companies to avoid.

Clearly if the US administration were to proceed alone, it could prove hugely disruptive to the world economy and would create an incentive for companies to relocate there.

However, if it were implemented globally it could end the worst excesses of multinationals failing to pay their fair share.

The proposal is far from perfect and it could cause serious disruption for some business sectors. However the current approach, of tinkering with a tax that's not designed for globalisation, simply isn't working. We need to be prepared to think outside the box.

So I hope this Chancellor will seek to be a radical tax reformer. As we prepare to leave the EU such a new direction would send the best possible signal that Britain intends to remain one of the best places in which to start, grow and invest in the businesses of tomorrow.

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