Why everyone should complete a simple tax return

Mark Littlewood, Director General of the Institute of Economic Affairs, argues for a new way of looking at tax.

The British tax code has become bloated and unfair. Years of tinkering by successive governments has meant that instead of simply being a method of raising the necessary funds for government activity, the tax code has become a complex web of incentives and deterrents designed to engineer different economic and social outcomes.

We presently have a tax code twelve times longer than the King James Bible. It has trebled in length since 1997. It is almost

50-times the length of Hong Kong’s, considered to be the most efficient in the world. At the same time the country is suffering under the heaviest taxation burden since the post-War Attlee Labour Government, and yet both the political class and the voters seem captured by a mindset that higher taxes are the only way to balance the books.

Unfortunately, both for the country and the other contributors to this report, there is no single policy that we can introduce to remove these obstacles to a fair and effective tax system. It requires a change of mindset.

The first step is to return to first principles and ask what we want from tax. It is important to decide this in advance and determine what the parameters are in order to create a tax system that provides this outcome with the fewest economic distortions.

These economic distortions can range from the irritating to the significant. Tax breaks for certain types of activity will inevitably lead to business and capital focusing on that area at the expense of other activity with potentially better long-term benefit for the UK economy. On the other hand, sin taxes, such as taxes on tobacco, often far exceed the actual cost of the externality they are seeking to alleviate. This leads to a misallocation of resources and economic inefficiency.

To reduce this impact, there are a range of taxes we should consider for repeal. Many levies are simply unfit for purpose and should be replaced with single bespoke taxes to cover that area of economic activity. For example, if we decide that there should be taxes on environmental externalities, we should wrap up taxes such as Air Passenger Duty, the Aggregates Levy and renewables obligations into either an improved emissions trading scheme or a carbon tax. In the same vein, business rates, Council Tax, the Community Infrastructure Levy and similar property taxes ought to be abolished and replaced with a single tax on land value, rather than have a range of taxes that distort the property market.

While tax simplification will result in a better functioning economy, it can also be the basis of a fairer and more effective system. The oft-heard complaint from many about unfairness is that the tax code allows, or even encourages, people and businesses to avoid ‘paying their fair share’. Leaving aside the fact that a ‘fair share’ is no more and no less than the minimum amount of tax a person or company is legally required to pay by law, if we care about a system that makes sure those with the broadest shoulders pay the most we must simplify the tax code to reduce loopholes.

But while this might reduce the complexity element, it will not change the fundamental British mentality towards tax. For many Britons, paying tax is something that happens without requiring any real engagement from them. When they receive a payslip at the end of the month they see the amount they have paid to HMRC, but they never really ‘own’ that money. It never enters their bank account, so it can be mentally written off as the cost of doing business.

PAYE tax, where tax is withheld by the employer, rather than an employee having to fill in a tax return and pay a lump sum to the Exchequer at the end of the tax year, therefore hides from many people the real cost of taxation. A change in this, such as abolishing PAYE and other withholding taxes and requiring all Britons to pay their taxes directly to the Government, would force people to actually see the money going out of their account at the end of the tax year. The average wage earner would have to pay out £12,000 at the end of the tax year in income tax and national insurance – more than their energy, petrol and commuting bills put together, along with enough for a football season ticket! Forcing people to actually confront the cost of the tax code will change the mindset around tax rates.

This isn’t to say that I want people to have to undertake forensic-style accounting efforts to pay their annual tax. My ultimate goal is, as far as possible, every person in Britain filling out a simple one-page tax return once a year, and attaching a depressingly large cheque to it.

Reforming the British tax system in a more effective and fairer direction is not an easy task. But by forcing people to confront the actual cost of the tax burden, along with a radical simplification of the tax code, is a good place to start.

About Mark

Mark was Campaigns Director at human rights group Liberty before joining the Liberal Democrats as Head of Media and then moving to Progressive Vision where he served as Communications Director., Mark then became Director General at the Institute of Economic Affairs (IEA) in 2009. Mark is also a Board Member at Big Brother Watch and writes a regular column in The Times.

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