Tuesday, April 21, 2009

A tax policy that speaks volumes

I've been broadly supportive of our tax policy in the past, and the theme that has run through our proposals of establishing a greater degree of egality has been one that I can approve of.

However, I do think that the new proposals are as good a reflection of what is needed at this time as I could hope for. I'm not a believer in punitive taxation - I just don't believe that disproportionately bleeding the rich actually works, and merely encourages tax avoidance and, indeed, evasion, on a massive scale. However, it seems grossly unfair to give those who have even more. And that's why, for example, the idea of limiting tax reliefs to the basic rate is entirely reasonable.

Indeed, our tax system has been used as a laboratory for social engineering for many years. Offering incentives to save through TESSAs and now ISAs is an obvious one, but the panoply of reliefs for those willing to invest in companies, films or research and development have acted to distort the behaviour of those with discretionary income. Did the Victorians need tax incentives to invest in the new technologies of their age, or did they invest on the basis of achieving a true return? You cannot talk of freeing up the market whilst 'tricking' supply and demand, and the howls of protest when reliefs are withdrawn are a sign that investments have been made without consideration of the genuine needs of the economy.

At a time when Alistair Darling is talking about seeking another £10 billion in 'efficiency savings', changing your systems so as to reduce the adminstrative burdens is a good idea. So, instead of the complex bureaucracy of tax credits, why not take them out of the taxation system as far as possible, leaving more of their earnings in their pockets, rather than taking it away and then giving it back? Raising the personal allowance to £10,000 will save anyone earning more than that £705 per annum, as well as providing those with an annual income of between £6,475 and £10,000 with a benefit, albeit a smaller one. Perhaps the next step is to move towards a fully unified tax and benefits system, along the lines of proposals for a 'basic income'?

Tackling tax evasion has its attractions, and whilst I would be slightly hesitant in the absence of a statement as to how this additional compliance activity will be resourced, there can be few who would have a principled objection to such a crackdown. If I might be so bold to remind our Treasury team, please note the trend cost:benefit ratio of devoting more investigation resource.

The proposal to treat salaries on a cumulative basis for the purposes are calculating National Insurance Contributions liabilities is, I believe, a fair one. It seems ludicrous that you might pay no National Insurance Contributions if you have six jobs all paying £4,000, yet would pay over £2,000 if you have one job paying £24,000. In reality, very few genuinely poor people fall into the former category, and most of them would probably be working on an agency or self-employed basis.

Whilst a minor part of the overall equation, taxing flights rather than passengers makes sense, although I remain unclear as to how you make that work in an instance where a seat on a flight might not be sold until the last moment. It is, regardless of methodology, a statement of intent that, if people must fly, airlines should be encouraged to maximise loadings and cut out flights that are little used. Linking aviation taxes to the efficiency of the aircraft will encourage a switch away from older, more damaging aircraft, helping us to achieve reductions in carbon dioxide emissions and, regardless of your view on climate change, reducing the use of increasing limited stocks of fossil fuels.

There will doubtless be jibes from our opposition, claiming that we are unable to settle upon a consistent policy. They are undoubtedly right, but then the world has changed radically over the past year. Putting money in the hands of those most likely to spend it can only help to boost the economy over the medium and long term, and evening out the rate of tax deduction between the various economic groups is merely a long overdue step towards a progressive taxation system that is more transparently just.

We'll see what the Labour response is soon enough when Alistair gets on his feet tomorrow. We'll then see the criticisms that spring from the Conservative brains trust. However, they're still a bit light on proposals of their own and, until they lay out their strategy in terms of tax and spend, it will be difficult for them to establish the sort of credibility that lasts. Oh how they wish they had Vince instead of George...

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