Written evidence submitted by the TUC
INTRODUCTION
It is noted that1 "The Treasury Committee
has decided to launch its own inquiry into the principles which
should underpin the tax system, and invites written evidence on
the following points:
— What
are the key principles that should underlie tax policy?
— How
can tax policy best support growth?
— To
what extent should the tax system be structured to support other
specific policy goals?
— How
much account should be taken of the ease and efficiency with which
a particular tax can be imposed and collected?
— Are
there aspects of the current tax system which are particularly
distorting?"
This submission to the Treasury Committee is made
by the Trades Union Congress. The TUC is happy to provide oral
evidence in support of this submission if requested to do so.
PART 1 - THE
PRINCIPLES OF
TAX
Five reasons to tax
There are five reasons for taxation. Tax is used
to:
1. raise revenue ie to fund the activities of
government;
2. reprice goods and services considered to be
incorrectly priced by the market such as support for families,
tobacco, alcohol, carbon emissions etc;
3. redistribute income and wealth;
4. raise representation within the democratic
process because it has been found that only when an electorate
and a government are bound by the common interest of tax does
democratic accountability really work (this being a key issue
in UK local government at present); and
5. reorganise the economy through the operation
of fiscal policy.
Any system that determines the key principles of
tax must be take all these considerations into account.
The 10 attributes of a good tax system
An efficient taxation system has nine attributes
with one over-riding characteristic to which they all contribute.
An efficient tax system is:
1. Comprehensive - in other words, it is broad
based;
2. Complete - with as few loopholes as possible;
3. Comprehensible - it is as certain as is reasonably
possible;
4. Compassionate - it takes into account the
capacity to pay;
5. Compact - it is written as straightforwardly
as possible;
6. Compliant with human rights;
7. Compensatory - it is perceived as fair and
redistributes income and wealth as necessary to achieve this aim;
8. Complementary to social objectives;
9. Computable - the liability can be calculated
with reasonable accuracy;
All of which facilitate the chance that it will be:
10. Competently managed.
In combination we believe that these are key attributes
of a good tax system.
The six steps to managing taxation
The process of managing a tax system taking all the
above into account is a six step process:
1. Define the tax base. This is the first
essential step in creating progressive taxation and in promoting
the better use of resources within society.
2. Locate what is to be taxed. If the
tax base cannot be accurately located then there is no point trying
to tax it.
3. Count the tax base. Unless the tax
base can be quantified it cannot be taxed.
4. Tax the tax base at the right rates
of tax. In the process making sure the inter-relationship between
the various tax bases is properly managed to ensure that the essential
revenue raising, repricing and redistributive qualities of a just
tax system is vital.
5. Allocate the resulting revenues efficiently
and to best social effect. Tax is not just about revenue raising,
but is part of a whole revenue cycle that must also be properly
managed.
6. Report - governments must be accountable
for what they do with tax revenues or the democratic principle
fails.
We stress that we believe these three elements -
having proper and justified reasons to tax, using sounds principles
to design a tax system and having clear objectives in managing
a tax system are all inter-related. It is when that inter-relationship
fails that problems arise in the tax system.
PART 2 - TAX
AND THE
ECONOMY
Tax and growth
Tax is not an option within a developed economy;
it is an integral part of it. A developed economy is always a
mixed economy; the state and private sector do, without exception,
interact in such economies to create the environment in which
personal, social, political and societal goals are met. This
point is stressed: economic growth is an element in achieving
these goals, but it is not the sole way in which they are achieved.
As such any policy on growth has to respect other purposes for
taxation as well. This is clear from the attributes of a good
tax system, noted above.
It should also be noted that tax can only provide
a part of the solution to any economic issues that the UK faces:
tax is only paid when economic income that can be located and
assessed to tax is generated. Tax policy by itself cannot create
an environment in which additional government income of the scale
needed to resolve the level of unemployment currently suffered
in the UK will be generated. At best tax policy can only help
in doing so. Other policies will be needed as well.
That said, there can be no doubt that growth in employment
is vital to the recovery of the UK economy and to the raising
of the revenues needed to clear the government's deficit and if
tax is to play a part in this process it must encourage the creation
of the most jobs possible for the least government spending achievable.
This, in our opinion, means three strategies need to be adopted.
Firstly, our research2 has shown that
about £38 billion a year of subsidy was given to pension
contributions in the UK in 2007-08. We note that recent caps on
pension contributions and the economic downturn may have changed
this situation slightly but we do firstly question whether this
level of subsidy can still be justified when other elements of
government spending are subject to significant cuts and secondly
question whether the government might take more powers to direct
the resulting use of the funds in question to enhance employment
opportunities and the prospects for growth. We believe that substantial
resources might be redirected to activity that would create employment
if such intervention was considered.
Secondly, it has long been recognised that small
business is the biggest engine for growth in the UK economy. This
suggests that any tax advantage to be given to business to encourage
growth should be focussed on encouraging the growth of small enterprises
and the creation of new employment opportunities in this sector,
which often have the lowest cost of job creation. This is not,
however, assisted by current taxation policies where a number
of trends are emerging as evidenced by research we have undertaken
on effective tax rates:
1. The effective tax rates of large companies
in the UK have fallen to little more than 21% by 2009, with a
trend reduction of 0.5% per annum.
2. It is stated government policy to reduce headline
UK tax rates for large companies by 1% per annum for the next
four years.
3. Whilst changes in capital allowance rules
may have marginal impact on effective rates of tax it is highly
likely that sometime during this period many large UK companies
will see their tax rates fall to rates lower than those paid by
a majority of small UK companies, whose rate of corporation tax
is only set to fall to 20%. This will mean that the very long
established deliberate differential in rates in favour of small
business will have effectively been eliminated and this does not
appear to be a policy aimed at encouraging growth.
4. There remain significant administrative impediments
within the tax system to running small limited companies that
do also, unfortunately, provide some with opportunity for abuse
of the tax system on occasion. It would seem that creation of
a simpler style of corporate trading entity enjoying simpler tax
structures with regard to the relationship between an owner and
the entity which does at the same time eliminate opportunity for
tax abuse is an issue worthy of further investigation so that
impediments to growth of small businesses can be removed whilst
protecting the tax base.
Thirdly, and perhaps most importantly, since we believe
that government spending will be the instrument for the growth
we need to break us out of the current economic situation in which
we find ourselves, we believe that measures to tackle the tax
gap are vital if we are to raise the funds needed to promote the
growth the UK economy now needs. The tax gap is defined by both
H M Revenue & Customs and the TUC as the total of the tax
avoided, evaded and unpaid despite being declared as owing in
a period. It is, we believe, only when the government spends more
money into the UK economy through new engagement with the private
sector leading in turn to new employment that the multiplier effect
can fully function in the way that is desired to drive the UK
economy back towards full employment and, in turn, government
finances back towards balance. The most obvious means by which
this cycle can be financed is through spending financed by the
threefold process of tackling tax evasion, tax avoidance and overdue
tax debt. This can be done through a range of measures. In particular:
1. HM Revenue & Customs should recruit a
substantial number of new staff to tackle these three issues of
evasion, avoidance and debt: we do not see how they can be properly
addressed otherwise.
2. Local tax offices need to be re-opened. We
believe that this would make HM Revenue & Customs more effective.
We also think it important that tax is managed from within the
communities in which people live in the UK. This, we think is
part of the democratic process of taxation to which we refer in
the first part of this submission.
3. We support the introduction of a General Anti-Avoidance
Principle into UK taxation law and changes in the legal process
of interpretation with regard to tax law to make this purposive.
4. We believe that changes in accounting regulation
to make it easier to identify what tax is paid by multinational
companies in each country in which they operate ("country-by-country
reporting") would be of real benefit to identifying the UK
Tax Gap and drawing attention to the issues that arise with regard
to recovery of the right amount of tax from multinational corporations
trading in the UK.
By adoption of these and similar measures we believe
that important tax revenues needed to firstly prevent cuts and
secondly stimulate growth can be raised from within and beyond
the UK economy.
Tax and other policy goals
As noted above, the goals for a good tax system are
much broader than the promotion of economic growth, however important
that might be.
Within the constraints of space we note that a number
of vital social goals are not currently being promoted by the
UK tax system:
1. The need for a tax on financial transactions
to ensure that a) banks make their fair contribution to society;
b) that they are taxed on an equal footing to other services which
is not the case at present as VAT does not apply to their charges,
and c) to limit speculation has not been met by any measure so
far proposed for taxing banks. We believe that such a tax - popularly
known as the Robin Hood tax - is an essential component of a just
tax system.
2. The UK tax system is not progressive at present.
Effective tax rates by income decile have been calculated as follows:
Source: Byrne and Ruane, 2008; The dotted line
refers to the average for the first ten years of the Labour government
(until 2006/07). The continuous line refers to 2006-07 only.
The 50% tax rate may have helped change this profile
slightly, as has restriction on the pension tax relief available
to those on that tax rate, but it remains true that tax in the
UK remains far too penal on the poorest and those on middle income
and is overall beneficial in its structure and operation to those
on high incomes. Reforms to council tax, where higher tax bands
and a complete overhaul are essential, to national insurance contribution
rates (which are regressive) and to the amounts of tax relief
available to those on higher incomes to introduce overall caps
on other reliefs similar to that now applied to pensions, are
essential if this situation is to be addressed.
3. There is no tax incentive to reduce pay
disparity in the UK. The banker's bonus tax did this, and was
effective in raising revenue but was discriminatory in application,
not least because it only applied to bonuses and to the finance
sector. We note that Will Hutton believes that a pay differential
of 20 times the lowest earnings paid by an organisation is the
maximum pay differential that should be allowed in the public
sector. Assuming that low pay is defined as the minimum wage and
that 40 hours is an average working week then this would suggest
that there is at present a potential public policy issue with
pay of above approximately £250,000 per annum. Whilst limits
on pay can be imposed in the public sector this is hard in the
private sector but tax differentials to discourage such pay can
be created, for example either by the payment of increased national
insurance contributions by an employer on high levels of pay or
by removing tax relief for salary costs for businesses making
payment of remuneration above this level. We believe that these
are issues where more work needs to be undertaken to reduce income
disparities in the UK.
4. It is clear that carbon taxation is an
issue that has not been properly addressed by any government,
and where little progress is being made. If it is accepted that
global warming is a reality - and that is the position of the
TUC and the UK government - then finding appropriate measures
to firstly encourage green technology and secondly to discourage
carbon use (with necessary protection for those on lower earnings
levels) are essential. We believe that green technology is best
encouraged through direct government intervention, for example
through expanded industrial support. We do however think that
tax has a potential to reduce carbon usage that has not as yet
been properly explored, subject to the protections for those on
low income noted.
5. Wealth disparities in the UK remain high,
and as the work of Richard Wilkinson and Kate Pickett has shown,
contribute to a loss of well being for all in society and not
just the poor.3 Wealth taxes in the UK are widely avoidable
and are avoided. A review of wealth taxation and its reform is
essential. This is particularly true of Inheritance Tax which
has relatively little impact on those with significant wealth.
6. Access to housing is a key issue for
many people in the UK economy. Despite this very large numbers
of houses stand empty in the UK, often for extended periods. Allowing
reduced rates of council tax on vacant properties encourages this
practice. We have proposed that instead of allowing reduced rates
of council tax on such properties that they should instead be
subject to a substantial uplift in the council tax charge after
a reasonable period of vacancy (and with due allowance made for
those absent through ill health). We believe this would achieve
three goals. The first is additional tax revenue. The second is
that properties would be made available to the market place for
sale or rent. The third is that the blight of empty properties
will be removed from communities that suffer this problem.
7. Effective local taxation is essential
if local government is to be truly accountable to those who elect
it. In view of the government's plan to devolve more powers to
local authorities a review of the out-dated and regressive structure
of Council Tax is long overdue.
The ease of collection of tax
As noted above (The six steps to managing taxation)
unless a tax base can be defined, located, counted and taxed (or
collected) then a tax is inefficient.
If HM Revenue & Customs data on the UK tax gap
is to be believed then income tax and national insurance are the
least avoided and evaded taxes in the UK, proportionately. Their
rate of loss, according to HMRC data,4 is £15.8
million out of £253 billion, or an error rate according to
HMRC of 6%. In contrast H M Revenue & Customs estimate the
VAT gap is 12% and the corporation tax gap is 16%.
This very clearly implies that indirect taxes are
a much less efficient way of collecting tax in the UK than direct
taxes for the vast majority of sources of income, the exception
clearly being with regard to income generated from business activities.
Since VAT loss is also related to business activities it is readily
apparent that to promote more dependence on indirect taxation
is inappropriate until better mechanisms for locating the corporate
and business tax base can be established. This does relate in
part to issues already noted with regard to corporate reporting
but it also suggests substantially enhanced regulation and control
of the UK small business sector by the Department for Business
Innovation and Skills is required through the operation of Companies
House so that tax losses through what are, in effect, "missing
traders" are mitigated. It seems to us that this is an issue
of the highest priority at this point in time and until it is
then the generally accepted idea that indirect taxes are somehow
more efficient than direct taxes cannot be accepted and is not
a basis for action in the UK economy.
Distortions in the UK tax system
There are a number of very significant distortions
in the UK tax system. Some that are of concern to us are:
1. The regressive nature of the overall tax system,
as noted above.
2. The regressive nature of local taxation already
noted.
3. The bias in favour of large companies now
being built into the tax system, already noted.
4. The continuation of the availability of the
domicile rule, which we believe wholly inappropriate as it allows
discrimination on the basis of national origin within the tax
system.
5. The relative ease with which those with sufficient
means can abuse the UK tax residence rules remains a matter of
considerable concern.
6. The tax system still heavily favours capital
gains over income, an anomaly that only Nigel Lawson successfully
addressed.
7. The taxation of labour income remains at much
higher rates than the taxation of income from capital due to the
impact of national insurance charges on the former but not on
the latter: this is an anomaly that appears long overdue to be
addressed.
8. Consumption is now taxed at the same rate
as income - and consumption taxes will for many households now
form a greater part of their tax burden than do direct taxes.
This denies those in this situation the chance to save, invest
and create opportunity that is available to those with wealth
who do not need to spend all they earn on the basic needs of modern
living. This impairment to equality of access to the realisation
of the potential all people in our society latently enjoy is a
matter of serious concern and should be addressed in a fair tax
system.
9. Small businesses run as limited companies
are still being provided with opportunities to both save tax and
avoid national insurance when compared to those run on a self
employed, partnership or limited liability partnership basis.
This distorts business behaviour and provides an incentive for
tax abuse. This distortion needs to be addressed to encourage
a level playing field for all small businesses in the UK.
10. Tax relief on pension and other tax reliefs
is still worth considerably more for each pound expended by those
on higher rates of tax than it is to those on the basic rate,
meaning that the cost of pension saving is higher for those on
low income that it is for those on high income, an anomaly that
appears to make no sense in the current UK economic environment.
The creation of a level playing field where the amount of tax
relief granted for each pound expended by a taxpayer is equalised
would appear to make sense within the current economic climate
and to ensure that the goals of an efficient tax system are met.
In addition, the tax free lump sum allowed on retirement is always
worth more to higher rate taxpayers than to those on basic rates
of tax and this is another anomaly that makes no sense in the
current economic environment, where relief might appropriately
be restricted at higher rates.
January 2011
REFERENCES
1 http://www.parliament.uk/business/committees/committees-a-z/commons-select/treasury-
committee/news/committee-launches-inquiry-into-the-fundamental-principles-of-tax-policy/
2 http://www.tuc.org.uk/economy/tuc-16929-f0.cfm
3 http://www.equalitytrust.org.uk/
4 http://www.hmrc.gov.uk/stats/measuring-tax-gaps.pdf
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