Generally I think there is a wish to make life simpler. This can easily be seen in the events of the past year, which can be viewed as wish call for a more straightforward relationship between individuals and their rulers. In this piece I don’t offer any novel or clever ideas but hopefully you will see some common sense.
Arguments rage as to whether a bigger or smaller government is better I have never heard anyone argue for a more complex one. Looking at this question on a personal level, what are the areas of our interaction with the state that could be simplified?
To use a real live example, each month I pay into a pension and receive tax relief on the contributions. I like this because it feels like getting something for nothing.
On the other hand, my wife would like to buy a bigger house which is a problem, much as we can get a larger mortgage, the high cost of the stamp duty is a hurdle that we are yet to find a solution to. Like many other families, we will plan our lives to move as few times as possible due to the crippling size of the tax. By delaying moving we will delay all the associated economic activity.
On a more morbid note, we have life assurance so that if we were both hit by the same bus, our infant children would be provided for. I don’t understand the new rules on Inheritance tax but my gut says that the government would expect some money from my orphaned children if the worst came to the worst. Clearly this is an example of punishing good behaviour.
Broadly I expect to gain from the above situation, I receive pension tax relief on a regular basis, expect to pay stamp duty rarely and intend to avoid inheritance tax completely. Having said that, I would happily give up the regular boost to my pension if I could avoid worrying about the other taxes. I would rather pay slightly more tax in a simpler system.
Is there a case for netting these payments off and save a lot of people a lot of hassle and heartache?
What changes could bring this about?
Studies3 suggest by using a flat rate of Pension Tax relief at 25% then the cost of the relief would fall to about £4bn and reducing the annual allowance to £20,000 would further reduce that figure. This saving would almost cancel out the whole revenue from the two taxes mentioned above.
Who would benefit from this?
Basic Rate Tax payers, the “just about managing”, would see an improvement in their pensions as a flat rate relief of 25% would exceed their marginal tax rate. This would in time reduce the pressure on the State to support people in retirement and help people take more control over their own lives.
Richer workers would see a reduction in their ability to save into their, already larger than average, pensions so they would diversify their saving into other investments, possibly ISAs, VCTs or EIS, in order to save the money needed to meet the costs of their retirement. These investments would drive capital into new projects and oiling the wheels of the economy. This group would also save money on the lawyers’ and accountants’ fees needed to calculate their tax liabilities and build tax avoidance schemes. The speed of probate would be greater increased easing the lives of many dealing with grief.
Everyone would benefit from a more activity housing market whether that is older people who are more able to downsize or young families able to move to a slightly bigger house or workers able to move to take a new job in a different part of the country.
Who would be the losers?
The losers would be the lawyers and accountants as there would be less tax avoidance work although there would be more conveyancing and company start-ups to keep them busy.
What would be the political impacts?
I think these suggestions would be popular with the vast majority of the population. Both the taxes mentioned are unpopular and the rich would be paying the price through reduced pension relief. I suspend that far left who believe that more government is inherently a good thing would deride the changes, showing once again how clearly they understand the man of the street they are.
Broadly I believe that a simpler system would engender greater trust from the taxed. They would know that there are fewer loopholes for others to use and the system was more even. Less taxes give less opportunity or need to avoid them.
What other simplification could be considered?
This is just one example of a change that would simple the lives of millions of people. If you look at the Gordian Knot that is our relationship with the State.
There are a range of other changes would generate similar results whether it is the fact we have three taxes on income or that drivers pay both vehicle and fuel taxes. More complex areas like the interaction between big firms and governments in terms of taxes and reliefs is crying out for simplification.
While tax is never fair it is the price we pay to live in a safe and civilised society. Our faith in the system will only be increased if we believe others are not having a free ride, this can be achieved by operating a system that individuals can understand.
Sam recently joined the party having been a consistent Tory voter, though it was not until election of Jeremy Corbyn that he took an active interest in politics.