Sunday, 12 April 2015

Why personal progressive taxation has failed

If only to emphasise the triumph of Mammon over Christianity, today the emphasis in the election campaign is on taxation.  The problem with personal taxation is that its progressive nature—those who earn more pay at a higher rate—almost inevitably means that people will try to avoid paying some of their taxes by one means or another.  In addition, there is no agreement what the higher level of taxation should be: 45per cent as it is now, 50 per cent as it would be under Labour or 60 per cent if the Greens win (so chance of that then!).  In practice, no agreement at all about what would be an equitable higher rate of taxation. This means that it’s a political question: how far should we screw the rich?
The current taxation regime with its inevitable loopholes and legal—if not moral--means of tax avoidance is the creation of evolution and general election results.  Personal taxation  is in need of a radical overhaul because , in essence, its progressive character has now failed.  So we have to go back to basics and establish the principles on which a taxation system should be based:
1. It is generally agreed that those who earn more should pay more taxation---the rich should pay more than the poor.
2. It is generally agreed that the tax liability of the poorest in society should be reduced, that is if they pay tax at all, through an increase in personal allowance…one of the major achievements of the Lib-Dems while in coalition. 
That’s it.  Now how do you best achieve this?  This does not require any particularly radical thinking simply that everyone should pay the same taxation on their income with no loopholes, exceptions, being able to claim against taxation or whatever.  So if you earn £20,000 a year you pay 20 per cent of your income after personal allowance; if you earn £200,000 a year you also pay 20 per cent of your income after personal allowance.  If you seek to hide your income, then that’s a criminal offence with a mandatory jail sentence and mandatory fine of ten times your annual salary.  All bonuses from whatever source, whether in cash or shares, are taxed in the same way: so £2,000 shares worth £5.00 each would give a tax liability of £2,000.  My only exception to this system would be for those earning over £200,000 who would pay an additional wealth tax of 2 per cent. 
The result would be a taxation system that is easy to understand, remove the need for people to avoid paying tax particularly if a draconian system of punishment was introduced for those who try and ensure that those who earn more, pay more.

1 comment:

Rupert Mallin said...

Love your blog. Just add a point or two.

Progressive taxation means just that. I believe top earners/bosses paid 83 per cent tax under Margaret Thatcher's early years.Why can't we return to that?

As important for the poorest in society is VAT. Adding 20p in the pound on increasingly basic items of need, is the unattributed conveyor of income from the poor to the rich.

Isn't it the case that throughout modern history the poor have made the rich richer?