Sir John Redwood, Chairman of the Conservative Economic Affairs Committee, argues for a new way of looking at tax.
This article is part of a series on AAT’s call for a national debate to create a fairer, more effective tax system. Read the full report here.
Tax is always taxing. Taxes do harm to the people and companies paying them, taking away some of their ability to provide for themselves and to invest in the future.
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What about sin taxes?
Some would say that sin taxes are the exception, taxes that are imposed to change behaviours. Taxing people heavily to put them off smoking has substantial support now most people do not smoke.
The irony is that if these taxes do work then of course they raise diminishing revenue as people switch away from the behaviours governments regard as damaging.
There is also difficulty in getting agreement over which actions are damaging, and the danger that imposing a tax hits those on lower incomes but may do nothing to alter the conduct of the well off. There is little sign that a tax on sugar in drinks has cut childhood obesity as planned. People and drinks suppliers are good at work arounds.
The truth is that all governments need to impose an array of taxes to raise cash to spend on their priorities. They need to do so in the least damaging way.
They need to restrain excessive spending urges otherwise too many people are unable to pay all their bills to keep their families housed, fed, warm and clothed because tax is too high. They then need to turn to the state for financial assistance from the high taxes imposed!
Of course, all political parties in a democracy recognise the need to collect money from the better off and help those who are worse off, as no-one wishes to see people without a home and the main items for a decent life owing to illness, incapacity or other impediments to earning a living. We also want to provide good free collective services like police, defence, schools and the NHS.
A new starting point
A sensible government needs to start from the proposition that all taxes are harmful and examine how best to raise the cash they need to deliver good public services and support the incomes of the poor.
They need to grasp that if you set the rate of a tax too high you will not maximise the revenue from it. If Income taxes are set too high companies will locate and recruit elsewhere with lower taxes. People will not be motivated to work extra hours or try harder to expand their businesses.
If Corporation Tax is set too high then larger businesses will move abroad or expand abroad or shift transactions to lower tax locations. If taxes on buying homes and cars are set too high people will buy fewer of them, making do with what they have got.
If Capital Gains Tax (CGT) is too high people will not sell successful investments though they might
like to if there was no tax penalty. If one tax is too high and deters work or transactions then other tax revenue is lost. One person’s transaction creates other people’s work.
The Government also needs to understand that some taxes are easy to avoid and resented by those who pay them. At 28% CGT on second homes means many owners keep homes they no longer need or use much. Current rates of CGT on shares result in many richer people only taking gains in any given year up to the tax free allowance threshold (currently £12,300). Lower CGT rates would probably lead to more transactions and to more revenue.
The Government should see that taxing income is a tax on jobs. Government usually regard jobs as a good thing, encouraging people to earn to pay their own bills. It is therefore vital to keep jobs taxes to a minimum. It has to be financially worthwhile to work. If taxes on income – National Insurance and Income Tax – take too large a slice of anyone’s income, they are likely to work less.
Government must understand that taxing profitable businesses more can reach the point where fewer people bother to set up and grow a business. The profits they tax would otherwise be spent on expansion, productivity improving investment and the creation of more jobs.
There are far too many taxes and far too many offsets and complications in the tax rules. The UK needs to simplify whilst lowering rates. Have fewer exemptions and special cases, and realistic lower rates that will result in more revenue generation.
In a medium size economy open to the world, we cannot afford higher rates than the world average.
Lowering taxes pays off
We should set our Corporation Tax at the new world minimum of 15% to maximise revenue, whilst minimising offsets. Ireland collects much more revenue from big business relative to national income by having one of the lowest world rates of tax. We should make 40% the top rate of income tax to increase revenues from higher earners. Capital gains should be taxed at income tax rates if such gains are achieved within three years, beyond that, gains should be untaxed. This would also take a tax off the statute books.
It’s worth remembering that every time the UK has lowered these tax rates, the Treasury has collected more money.
About the author
Sir John was an Oxfordshire County Councillor in the 1970s. In the mid-1980s he was Chief
Policy Advisor to Margaret Thatcher and in 1987 he became Conservative MP for Wokingham, a position he has continuously held ever since.
A former Minister and Secretary of State, Sir John has been Chairman of the Conservative Economic Affairs Committee since 2010. Sir John was knighted in 2019 for political and public service.
AAT Comment offers news and opinion on the world of business and finance from the Association of Accounting Technicians.