A Silver Lining (Part 7)

Would it be wishful thinking to hope that that there is a silver lining to the Covid-19 cloud hanging over the world? Every event that brings about change also brings about opportunities.

Taxation, that word we all hate, looms hard on the horizon.

We are all aware that the Government has embarked on some radical financing in an attempt to at least keep the economy and employment at a reasonable level, for which we laud them, but, we also know that a day of reckoning must come when the Government starts trying to repay the borrowings incurred. We have already seen various sectors of the economy calling for reductions in Business Rates, VAT and business contributions to National Insurance, does this mean an even bigger proportion of tax is going to fall on the shoulders of the individual, somewhere in the reasonably foreseeable future?

Alas, taxation is simply a method of distributing the cost of running the government among the people.

Tax has always been resented by people, the French and American revolutions were finally started as the result of imposition of a new tax, the French resented a tax on salt, while the Americans reacted to a tax on tea, Margaret Thatcher’s demise can be attributed to the attempted introduction of the ‘Poll Tax’. The ‘Whig Party’ suffered a similar fate after trying to introduce a tax on land. Various governments have tried different ways to raise an invisible tax, for example, King Edward 1 reduced the quantity of silver in the coinage from 99% to 92.5%, justified as improving the durability of the coinage, perhaps this was the only successful tax, but it is difficult to derive inflation figures for that time to check on it’s outcome.

The most important thing about a taxation system is that it must be fair and seen to be treating people equally with no one getting an advantage over others. Our own system is overly complex with different classes of income being treated differently in different hands. This has spawned a fairly significant tax avoidance industry. With sufficient wealth one is able to avoid paying your fair share of tax and perhaps even avoid it altogether.

If we wonder at the lack of trust of politicians, consider that Income Tax was introduced, as a temporary measure, to finance the debt incurred during the Napoleonic Wars. Over  200 years later the temporary tax is still running! I wonder what new temporary taxes Rishi will find when he starts addressing the holes in the government’s purse.

During the mid 1970’s we first started seeing proposals to do away with income and capital gains taxes replacing them with a cash flow tax. A study during the early 1990s, by the IMF, considered this a viable choice, but, had concerns about how much the informal cash economy might grow as a result. In today’s world where cash is becoming less and less significant it becomes worth looking at again.

The attractions of a cash flow tax are mainly because cash flow is an extremely wide base, making a low rate possible, as it captures all transactions entered into within the economy, apart from unbanked cash. Low tax rates make elaborate tax avoidance schemes redundant. The cost of administering and policing are very low. Systems can be introduced into the banking sector whereby as soon as a deposit is made the corresponding tax proportion is automatically transferred to the exchequer.

The problem of Google, Amazon and other multi-nationals not paying tax even though extracting large amounts of revenue from the economy disappear. The main overall effect is that it shifts the largest burden of the tax bill from the individual to the corporate sector, however as on introduction you would allow businesses to add the tax to their prices their profitability should not suffer except if they have very indirect supply chains. While the consumer will end up with a far greater disposable income there will be an inflationary impact on prices, also pension funds will require greater contributions as they will also be taxed at the same rate on their revenue.

Unbanked cash can be dealt with in two fairly simple ways, firstly one could make cash transactions above a certain amount illegal and secondly we could periodically change the notes in circulation making the old notes unredeemable after a certain period of time, except by banking.

During 2013 I did an exercise based on the 2011/12 UK GDP figures. This indicated that a flat cash flow tax of less than 6% would have equalled the tax collections during that year in respect of PAYE, Income Tax, Corporate Tax, Capital Gains Tax, Stamp Duty and VAT. This exercise did not even attempt at quantifying the extraneous cash-flows resulting from the private sales of motor cars, or the much bigger issue, the cash-flows that result from the couple of trillion $ worth of forward exchange contracts processed in the City of London daily. I also applied a ‘phasing in’ discount of 80% on stock exchange transactions. The results indicated an inflation of retail prices of 4.5% for businesses to sustain their trading levels, while the individual’s disposable income would have increased by nearly 8% making the increased pension contributions, that would be needed, easily affordable.

The difficulties in implementing this would be our need for consent from all countries where we have double taxation agreements. It does bring about a system where tax is earned by the country where the transaction happened rather than the nominal domicile of a company or individual, which has become an issue looming, ever larger for all countries, in this digital age.

While at first glance an all encompassing Cash Flow Tax might seem regressive, as soon as one examines it, you see that it is actually very progressive in placing the burden squarely on the shoulders of those who can afford it.

Because Income Tax has existed since the early 1800’s it does not mean we have to persist with a broken system, when a simpler, more efficient and sustainable system can be put in it’s place. The Accountants and Lawyers might shout at the taking away of a revenue stream, but they are all intelligent enough to earn their money by helping businesses to become more efficient, instead of completing Income Tax returns.

Post Covid-19, we should be looking at how to make things better for all, more sustainable and environmentally healthier, rather than to simply try and get things back the way they were. We have all smelled the cleaner air, heard the birds singing and I am sure we would all like to see that preserved for our grand children and their children. Let us use the opportunity to rebuild the world in a better way.



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