Merryn's Blog

Our tax system is hopelessly complicated and inefficient. Let's dump it and start again.

Covering 12,000 pages, Britain's tax rules are massively complicated. So what would an ideal tax system look like?

I've often written here before about the excess burden of taxation the added deadweight effect of the time and effort involved in paying and avoiding it, along with the unintended consequences it pretty much always creates.

But here's an unusually graphic illustration of the concept: in the US, there are 6% more fatal crashes on tax filing day than there are on an average day. That's a figure based on 30 years of accident data. It's also one that tells us just how stressful the tax system in the US is for ordinary people.

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More stats on this? Sure.

In the last decade there have been 4,428 changes to the US federal tax code. That's more than one a day, something that means that Americans spent a total of 7.64 billion hours in 2010 negotiating their tax related paperwork (reason.com). That is more than twice the working time of all the primary school teachers in the US. Odds are it is also one of the reasons why a rising number of people are trying to give up their American citizenship.

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But we have no reason to feel remotely superior about this in the UK. Here, while I can't give you any numbers on traffic accidents on the last day for self-assessment returns to be filed, I can tell you with absolute certainty that our tax system produces a massive excess burden.

In 1997, our tax rules already filled a ludicrous 5,000 pages. By 2007, despite the use of smaller type to try and contain matters, that had risen to 11,500 pages. It kept rising under Labour and it is still rising now.

This might as, Tullett Prebon's Dr Tim Morgan points out, make the UK a happy hunting ground for tax specialists and those determined to avoid paying tax. But it is a nightmare for the rest of us, for HMRC and for all chancellors. "Can anyone actually read, let alone fully comprehend a set of tax rules covering 12,000 pages of closely spaced type?"

So what would an ideal tax system look like? It would raise enough money to cover our costs. It would be cheap to administer and it would have a "minimal adverse distorting effect on the economy." By these measures, says Morgan, our system is quite clearly nigh on useless.

It doesn't raise enough money (though like Morgan I think the answer to that is probably to cut spending). It isn't cheap. It isn't equitable. And it is an utterly "abject failure" when it comes to the distortion test.

All this is partly down to the way that bureaucracy automatically plagues public services of all kinds, but our 12,000 pages are also symptomatic of the fact that the road to hell is paved with good intentions.

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Each change and each addition comes from a chancellor trying to make things better: trying to give a deserving cause a break, to encourage one part of the economy over another, or to discourage some behaviours (smoking and drinking) while encouraging others (charity giving, early stage VC investing and so on). But in formalising each new change, chancellors create new vested interests: once in the book, no tax or tax break ever leaves it.

The question, then, is how we create a tax system that actually works, one that is efficient, simple transparent and fair (the conditions Adam Smith laid down). The key seems to be to make it cheap and to remove excess burden as far as it is possible by making it very, very simple.

One way to do this is the land tax, which I have written about here before. This is a very good and very old idea whose time has never come proving yet again that good ideas never die, they just get ignored.

Then there is the flat tax, something that has seen some success elsewhere and that George Osborne was once very keen on. He hasn't mentioned it recently, but it is well argued for here (by Osborne), has some record of success, and is now much discussed in the US.

Finally, there could be a flat consumption tax applied across the board consumption taxes and land taxes are the least distorting of all taxes, according to the OECD.

None of these things are going to happen our politicians just aren't strong enough to bring in major or controversial change. However, you can see Osborne trying his attempts to clamp down on tax reliefs and to set a minimum tax rate for the rich are baby steps towards tax simplification and ones that should be applauded.

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With that in mind, I am deeply disappointed to see that David Cameron is not applauding them: according to the Mail he is "signalling retreat" on the clampdown on tax hypothecation via charity relief.

One step forwards. One step back. Bother.

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