Is the UK’s tax system out of date and no longer fit for purpose?
Many people, including myself, would say it is.
Politicians, though, seem unable or unwilling to address the creaking tax and social security systems.
Here are some, perhaps radical, ideas that could transform the lives of ordinary people. The proposals are unlikely to meet with approval from the very wealthy, from those who receive very high incomes, or from those who otherwise have a stake in the status quo. Nevertheless, here goes:
1. Realised comprehensive income
By adding together an individual’s earned income, their dividend income, their savings income, their property income, their capital gains, and their receipts from legacies, one arrives at an individual’s realised comprehensive income.
Taxing comprehensive income simplifies the tax system and makes it harder to avoid tax because all types of income would be taxed at the same rate. The current system taxes the individual components of comprehensive income at different rates. The current system hence provides incentives for taxpayers to manipulate their affairs so as to take advantage of differential tax rates. For example, under the current system, it is usually advantageous for an individual to take the benefit of a transaction as a capital gain rather than as income. This is because capital gains are generally taxed at a lower rate for individual tax payers.
2. Increase annual tax free allowance to £100,000
The first £100,000 worth of comprehensive income received in a year would be tax free. Such a move, were it to be implemented, would take most, perhaps as many as 98% of tax payers, out of income tax altogether. Only those with comprehensive incomes above £100,000 would be liable for income tax. Incomes above £100,000 are more likely to be unearned, they deriving from rent extraction activities, holding gains, and luck. It is unlikely that extremely high incomes result from a commensurate contribution towards the common good. Genuinely earned income, that is income derived from an individual’s contribution to society, is likely to be lower than £100k per year and should therefore escape income tax altogether.
3. Simplification of income tax
Every income tax payer would have the same marginal rate of tax. This would ensure the average income tax rate rises with comprehensive income.
A formula can be used to determine an individual’s tax rate taking account of their annual comprehensive income. The formula would only be applied to comprehensive incomes above £100,000 p.a.
An example of such a formula is a follows:
0.9 x (Y – £100k)
where Y = annual comprehensive income, the £100k shown in brackets is the annual tax free allowance and the 0.9 (90%) is the marginal tax rate and the limiting tax rate (i.e., the tax rate will never exceed 90% however large an individual’s comprehensive income may be)
Here is a graph which plots comprehensive income against the applicable average tax rate using the formula shown in blue.
The graph shows how an individual’s average tax rate is determined by their comprehensive income. For example, an individual with an annual comprehensive income of £0.4 m would have an average tax rate of just under 70% of that income, (the exact percentage is 67.5%).
An individual with a comprehensive income of £0.1m or less would not pay tax on their comprehensive income at all.
As an individual’s comprehensive income increases the closer their average tax rate approaches the 90% limit. However, no individual, however high their comprehensive income, will have an average tax rate of 90%; but very high comprehensive incomes will come close to the 90% limit.
Taxing comprehensive income this way is consistent with free market principles. Company directors and others who can, and do, effectively set their own pay will continue to be free to do so. Using the proposed formula to assess tax on comprehensive income supports freedom but also enables society to benefit. A high marginal rate may also discourage “superstar” remuneration, and thus may help to address runaway inequality which is becoming increasingly prevalent.
4. Universal Basic Income
The introduction of a universal basic income would guarantee every adult citizen of the UK an unconditional basic income. This would guarantee every citizen social security. This would obviously need to be funded and a Land Value Tax may provide such a fund. A quick estimate suggests that £208 bn per year would be need to be raised to pay a basic income of £100 per week to 40m adults. This is clearly a lot of money.
The universal basic income would have many benefits. For example, the minimum wage could be abolished. The bargaining power of workers would be be enhanced in wage negotiations with employers. Self-employment, because of the risk reduction impact of a basic income, should mean more workers eschewing employment in favour of self-employment. This would contribute to economic dynamism and creativity. A basic income may permit younger people to stay on at college to acquire skills from which they, employers and society benefit. The benefits of a universal basic income are manifold and, encouragingly, the concept is increasingly finding support from both the left and right ends of the political spectrum.
5. Land Value Tax
A tax on the value of land is thought by many to be a rich potential stream of taxation income. It has been suggested that, very approximately, one-third of the value of a house is due to the value of the land the house sits upon.
A land value tax would be an annual charge on land owners. It would be charged as a percentage of the value of land owned. Whether a Land Value Tax would provide sufficient funds to finance a meaningful Universal Basic Income is at the time of writing unknown to this author.
A powerful argument in favour of a Land Value Tax as a means of funding a Universal Basic Income is that it supports justice in distribution. Land is a God-given resource which should be available to everyone to profit from. But the land is owned by private individuals who capture the benefits of land ownership despite having acquired the land by means of dubious morality in the first instance. So it makes sense that landowners should fund a Universal Basic Income to compensate those who are forcibly displaced from the means of subsisting from the land.
Tax rates for comprehensive income of up to £8m p.a.