The UK Tax System requires an overhaul, so …
Imagine a Chancellor who opens his budget speech with the following words;
“Today I bring you tidings of great joy!
I bring you a budget designed not only to reduce our annual deficit in absolute terms but to put back in your pay packets the money we failed to collect from the corporations and multi-nationals!
We are going to consign the Tax Avoidance Industry into the dustbin!”
Impossible, you say.
Well, yes, if we don't break out of our current thinking.
There are many reasons for the situation we find ourselves in, and there is nothing gained by pointing fingers and ascribing blame. The use of proceeds of privatisation by the Thatcher and succeeding governments to create unsustainable tax cuts, the laissez faire or cavalier attitudes of Gordon Brown, have all been documented in my previous blogs.
If we think outside the box
Apply a little lateral thinking, everything becomes possible!
Let us take a quick look at
Tax avoidance / evasion.
We tax in terms of “the letter” of the law. Not based on some moral imperative.
We tax based on Residence.
We tax Income and Capital differently.
Our avoidance law relies to a large degree on a test of normality.
The Landscape has changed, an increasing share of business is undertaken by multi-nationals. Trading via the Internet which knows no geographic boundaries. Few of our own Corporations do not have offshore subsidiaries.
Transfer Pricing is the major weakness of the system as increasingly goods and services are charged to the UK based business by offshore subsidiaries, and we have no means of establishing the actual cost of those goods or services. The corporate who fails to ensure that the largest share of it's profits emerge in a tax haven is simply doing a disservice to it's shareholders.
No point in talking about Amazon, Google or Starbucks they are simply doing what their shareholders expect … maximising their after tax profits … legally!
If we imagine that it is possible to change our tax law so that, that cannot be done, then we have quite an imagination! Year after year we have attempted to close “loop holes”, but alas it is beyond our power. It is not loop holes that need to be changed, it is the whole tax structure. It is a question of what we tax.
Let's have another look at tax.
What are we trying to do when we levy tax?
Simply trying to find a way of distributing the cost of running the government and the country!
By one means or another that cost has to be paid.
Historically tax was mainly applied to possessions, you assets. The wealthier you were the more tax you ended up paying. Around the mid 1800's Income Tax was reintroduced into the UK economy (having previously been used to finance the Napoleonic Wars), as a temporary measure which is still it's status today.
The objective being largely to reduce the burden of the cost of government from the wealthy landowners, and to get a bigger contribution from the general population. It was simply, a means toward spreading the load over many more shoulders and avoiding an increase in the property taxes.
What alternatives do we have to Income Tax?
If we consider that we should be paying for some kind of service or benefit we gain.
What do we all use that is provided by the government?
Our currency!
In theory, at least, they (the government) manage our monetary system and provide a regulatory framework (admittedly sometimes rather more lightly than necessary) for that system to work. Without it we would be down to barter!
Why don't we simply charge a fee for using our money?
In the late 1970's I (amongst 00's of others) started writing about such a system.
Cash Flow Tax!
A Cash Flow Tax is a charge for making use of the monetary system. It is a flat rate tax that is applied as and when money is deposited into a bank.
As a tax, this is very easy to collect, banks simply pay over to government the percentage as and when money is deposited. No big HMRC required outside of running a continual audit of the banks books.
Because the tax ignores the underlying nature of the transaction, taxing all receipts regardless whether capital or revenue, it has an extremely wide base which makes for a relatively low rate of tax.
To demonstrate the wide base (utilising 2011 UK National Accounts)
| Gross Household Incomes | 1.10 Trillion |
| Undistributed Business Profits | 0.41 Trillion |
Total Subject to our Tax net (should = GDP) | 1.52 Trillion |
Income to Householders | 1.11 Trillion |
Internal Sales at Retail Level | 1.54 Trillion |
Goods and Services to Retailers | 1.41 Trillion |
Exports | 0.49 Trillion |
Cash Flows for Goods and Services | 4.55 Trillion |
Capital Items (Sales of Assets) | 0.65 Trillion |
Cash Flows excluding Financial Items | 5.20 Trillion |
From the above we can see that if we were taxing cash flow rather than income our rate would be less than a third of what is required under a system of taxing incomes.
Obviously with any tax system there are anomalies, lets deal with those created by this system.
Penalising the poorest sector of the economy.
Because the tax is a flat rate the impact could be severe to the poorest in society, where even taking away a few pounds from their budgets can be the difference between being able to feed oneself and starving. We would have to increase the levels of the social security net. My model shows that an increase of one tenth of a percent in the rate would an additional 5 billion to the coffers, and catering for this sector of society once again becomes affordable.
We would also probably need to allow a special type of bank account that is automatically exempted from the tax to people with incomes below £200 a week. Possibly up to income levels where current average tax rate equals the rate which we apply on the cash flows … somewhere around £15000 a year.
The risk of a large informal “cash only” economy developing.
To protect against an excessively large informal sector developing, one would make cash transactions above a certain amount illegal, for arguments sake £250. Yes we would still have an informal sector, but on a far smaller scale than today. Obviously there will be people who break the law and accept larger amounts than £250, but statistically this information will be available from banking records. A history of how much cash you draw will have certain levels that will trigger enquiries from HMRC audit!
Cash has become a far smaller component of economic activity, with probably 99.9% of transactions now operated through the medium of Plastic. Even the informal sector is forced to have credit and debit cards to enable payment for raw materials or goods through the internet.
The cumulative nature would place our own businesses at a disadvantage to imports.
To counter this effect we would need to apply a withholding tax on all payments out of the country. Possibly this tax would need to be at a higher rate than the cash-flow tax, to simulate the cumulative effect of the cash flow tax on UK businesses. I would imagine something like between 33% and 50% higher.
This Withholding Tax would have two objectives:
Firstly to ensure a level playing field for our own business.
Secondly to discourage the multi-nationals (or people of high wealth) from simply draining resources from the country
See the true effect of Amazon's tax avoidance activities.
Exports would be taxed, while I consider this right most countries exempt exports from sales taxes and the like, and we would probably need to follow this practise.
If you think this all too radical
In 1993 the IMF issued a paper on this as an alternative means of taxation. The main difficulties they foresaw were related to the risk of avoidance through development of a large informal sector operating outside the banking sector. They also considered transfer pricing a possible means of avoidance. (Transfer Pricing refers to imports of goods and or services at prices that exceed their real costs … often with legs to the transactions going to tax havens)
I have dealt with these problems above as well as some others that came out of my debates with others who were interested in the model during the 1980's.
Here are my results of applying this to the UK
Utilising a rate of 6.3%
After dropping Income Tax, Corporate Tax, Capital Gains Tax, Estate Duty and Vat.
Based on 2011 Blue Book figures we would have
Dropped the Government Deficit by £ 36 billion (more than 25%)
Put in the hands of the consumer £ 89 billion
Taken from business £ 102 billion
Taken from transfer of Assets £ 14 billion
Taken from the evaders £ 9 billion.
I have applied rebates to various types of transaction caught in the net, and at this stage totally excluded certain categories of transactions, details are available on request.
Impossible you said!
Yes, as long as our politicians are not fit for purpose, nothing is possible!
We will simply sink into the quagmire they create until eventually it is above our chins and in a last gasp we shout;
"We should have fired them!"
If you would like a copy of my model where you can check how I arrived at the different figures, my assumptions, the rebates I applied to various transactions and my reasoning. Please leave a comment with your e-mail address and I will get back to you. I don't usually publish comments, so let me know if you want yours published.