Our horrendously complicated tax system undermines the quest for growth and sends mixed messages to taxpayers about the kind of behaviour the Government wants to encourage. To tackle the deficit and debt mountain and put Britain on a firm economic footing, we have to build a sane tax framework.
Years of political expedience — rewarding this or that influential group with a tax break or preferential treatment — have created a labyrinthine system that penalises job and wealth creation. Risk-takers who would start a business are deterred by high rates of tax on success; successful businesses are discouraged from employing new staff by a nonsensical tax on jobs; and benefits claimants are dissuaded from earning by the huge marginal rates of tax levied on lower incomes. Thankfully this year’s Budget was a step in the right direction.
If the tax system was better designed to promote our economic and social goals, it would be a social duty, even a moral obligation, to encourage people to pay the least amount of tax that they are legally allowed to. Governments are notoriously bad at spending people’s money wisely. They should collect the minimum amount necessary to secure a civilised society in which core public services, such as defence, policing, healthcare and a sound legal system, are available to all. These taxes should be collected in a rational way that encourages job creation and growth, while discouraging pollution and waste.
People tend to make better decisions for themselves and their families with their own money. Likewise wealth creators will naturally invest where profits can be made and jobs created. It is better if people can make these choices without worrying too much about hidden tax implications.
Some features of the current system work well. If we want people to save more for retirement, tax reductions for long-term saving are welcome. If polluters should pay, a landfill tax has merits. But we must define the goals of specific taxes beyond simply to raise more money for the Exchequer.
Today’s complicated patchwork of duties, taxes and tax reliefs tells its own story. Holidaymakers are enticed with duty free goods; homebuyers tempted with stamp duty free periods; and drivers are urged to swerve around the higher costs of car tax, petrol duties and tax discs by buying smaller cars. All of these are forms of tax avoidance, but are we to conclude that people are morally wrong to respond to the incentives they provide?
So conducting an arbitrary moral war against the majority who are merely responding to legal tax incentives is unwise. The current tax system is doing exactly what it has been “designed” to do. The problem lies in the design — or rather the lack of design.
Judging by recent headlines, an unwelcome sentiment has crept into the debate on tax. l legitimate avoidance of tax is somehow coming to be considered as corrupt as tax evasion. Everyone accepts that illegally withholding tax is morally unacceptable. But it is not the same as tax planning and avoidance. It is not wrong for pensioners to avoid tax or philanthropists to use tax reliefs. We must be careful not to say that these people are reprehensible unless they actually break the law. Blame for some of the more notorious examples of tax avoidance should fall firmly on the shoulders of legislators.
If our leaders manage to create a tax regime that actually promotes our social and economic objectives, the temptation to smear philanthropists — or indeed any group of citizens — would evaporate. Opprobrium could be rightly focused on law-breakers alone.
Law-abiding taxpayers should point the finger straight back at MPs who say that perfectly legal behaviour is wrong. The desire to create wealth and the instinct to maximise family income by minimising tax is exactly what is needed to kickstart the economy.
While evasion is plainly wrong, tax planning and avoidance should be a moral duty in an ideal world of simplified taxation.