October 2012 (123) – Tax planning? Why try and beat the system? Change it!

As we come to the end of the annual party conferences, I am left with the usual disappointment of unfulfilled promises, unachievable rhetoric and delusionary diatribe against rival politicians.  And this year again, it feels like ‘Them’ and ‘Us’ – Them, not having a clue what Us really want.  So let me try and spell it out, not just as regards the UK but for most of the developed world.

The two main functions of a taxation system are to provide government with the resources to fulfill its social and economic requirements, and to regulate the economy throughout its cyclical progress.  The party conferences should have asked whether the current system is achieving these aims.  We hear so much in the papers about tax schemes costing the UK exchequer £5 billion or more, and my article in last month’s newsletter entitled ‘Tax Planning and Morality‘ explains my views on these schemes.  But clever schemes using semantic interpretations of the law rather than its intended purpose are partly created because of the complexity of tax law. And partly because of the high rates of taxation.

Another recent article I wrote was entitled ‘Letter to the Chancellor‘ and was a repeat of an article I first wrote in 1996 just before Tony Blair came to power.  It advocated then, as now, a re-think of the high rates of direct taxation and a shift towards a multi-rate VAT system where luxuries attract higher VAT rates than items generally required for day to day living.  The concept?  To give taxpayers a choice of how to spend their income.  

Just imagine a 20% personal and corporate rate of direct taxation – certainly if that were the case the BBC wouldn’t be accused of aiding and abetting unacceptable tax avoidance through the use of personal service companies.  Tax avoidance schemes themselves often cost a significant upfront percentage of the tax saved without any guarantee that the schemes will be successful.  So a significant reduction in direct taxes would certainly eliminate much of the savings that would otherwise (perhaps but more likely perhaps not) be achieved.

A 20% direct tax rate would probably encourage more individuals to go out to work, if they were left with 80% of gross income; subject of course to more jobs being available.  The individuals would then have a choice as to how to spend their money depending upon their family or other circumstances.  And the rich?  Those ignoble individuals who are attacked by some as the unacceptable face of capitalism, yet who are in fact the bedrock of our society through the revenue they create through their entrepreneurialism and job creation?  Well they certainly wouldn’t be motivated to leave the country, nor to enter into convoluted tax avoidance schemes which have little chance of success.  And for the UK, Ireland and other countries offering the remittance basis of taxation, maybe the long standing benefits for resident non-domiciled individuals could at last be discarded if individuals have lived in the country for more than a temporary period of say 5 years – that’s what a 20% rate of personal income tax would achieve.

And finally, the tax evaders, those who justifiably incur the wrath of government and public alike – in today’s age of TIEs (Tax Information Exchange Agreements), FATCA and other bilateral and multilateral agreements, they would be incredibly naïve to expect their wealth to escape scrutiny from Revenue authorities. An amnesty offering a one-off 20% tax charge on offshore wealth repatriated to the country where they live may achieve billions of unpaid taxes and enable these miscreants to contribute again to the society in which they live.  It has been estimated that if some wealthy Greek individuals paid just half of the taxes they have evaded, Greece would not have required a bail-out from the EU nor the austerity measures now in place.

What about the tax on employment – social security charges or national insurance contributions as they are known in the UK?  A rose by any other name is a rose, as is a tax.  In many countries, such a tax is a disincentive to employment and should be limited – the UK fortunately is not in the list of countries where such disincentive is a major consideration but there are many countries whose social welfare costs need to be created in other ways which do not discourage employment.

For there is no doubt, high levels of employment are fundamental to the wealth of a nation, providing the basis for an increase in GDP and a lowering of budget deficits. Keeping costs of employment down and providing an incentive for individuals to work by providing an increased take home pay through lower rates of direct taxation, will undoubtedly stimulate employment levels.

All well and good, of course, but how do governments pay for all their social and economic requirements if they reduce their revenue by the billions lost through a lower rate of direct taxation? Well firstly, I think this is a question which merits greater examination, since how do we know that billions of revenue will be lost?  Tax avoidance schemes would certainly be less appealing, tax evasion would be viewed in a different light, greater employment would increase revenue even with a lower income tax rate (as well as stimulate consumer spending), and low corporate tax rates would encourage investment.

But even accepting that revenue from direct taxation may be decreased, higher VAT rates on certain items coupled with higher indirect taxes on other transactions including property transfers would replenish any deficit incurred. What is needed are politicians with imagination, possibly an oxymoron, but certainly not politicians who can think only of their next 5 year term of office.  Personally, I would vote for a political party who would have an overall reform of the entire tax system, even if this took more than five years to come to fruition.  And this in not a UK-centric issue – it is a global issue.  Barack Obama’s famous vote catching phrase, “yes we can” has a fairly hollow resonance four years later – more like “well we could have done if we really meant it”. 
With my best regards 
Roy Saunders