In my last post, which was a little while ago, I vented my spleen and rubbished Her Majesty's Tax Credits system. It seems nobody has a good word to say about the system as it stands, except perhaps that "it's better than nothing". The Lib Dems have suggested some ways to simplify the system and make it more flexible when it comes to changes in earnings, which I applaud. But, in my opinion, the system is fundamentally rubbish, and a more radical and imaginative solution is called for.
Enter NITS: Negative Income Tax System. The principle is simple, if a little unusual; we traditionally pay tax at a positive rate, and if we are in the 20% band, we owe 20% of those earnings to the revenue. There was (until recently) a 10% rate below this, and under this a tax-free allowance, which you could say was really a 0% tax band. Now imagine another band below this, for the people on the lowest incomes, a -20% band. These earnings would not only be exempt from tax, but would be due an additional 20% payment from the revenue. To put it another way, rather than paying a 20% tax debit on higher earnings, those on lower earnings would receive a 20% tax credit.
So, given that we have a tax system that, for most people, calculates and deducts tax from your pay before you ever see it, it should hardly be difficult to design into this system the ability to automatically supplement the pay of people on low incomes by applying a simple negative income tax formula. This in itself would be a massive improvement on the ridiculous situation we have now, where you must pay tax first through one system, then apply to claim it back through a second system. But, if we apply this principle slightly differently, then much more than tax reform becomes possible.
Instead of applying a negative tax rate per se, we set a guaranteed minimum income for every citizen in the country, for the sake of argument say £5000 a year. The revenue then simply credits this sum to everybody's tax account (either in one go, or perhaps in installments) for them to spend or save as they wish. This payment will still count as taxable earnings, though, so any further earnings will be added on top of it, until a certain threshold is crossed, and tax becomes payable.
Provided the tax bands and rates are properly set, we could then have a system where the lowest paid will be paying no tax, and have their income supplemented by a £5000 a year stipend. Those slightly better paid will be paying a little tax, but this will be offset by the initial £5k they have already received, so they will still be net beneficiaries of the system. Further up the scale, there will be a level where people are well paid enough so that the tax they pay entirely recovers the initial payment, above which they will become net contributors. And so the tax system continues to escalate as normal, and of course the very highest earners will be paying so much tax that it will dwarf a £5 grand payment. The government gets its tax income, and all the initial stipends paid by the revenue are claimed back automatically through tax, but only by those who can afford to pay it.
Now, you may have noticed two problems with this system: firstly that it sounds very expensive, and secondly that a guaranteed minimum income, applied in this way, would be payable to everyone, whether or not they are working. Well, hold your horses, because let me tell you that both of these seeming problems in fact add up to one massive advantage.
The truth is, we are already paying people who don't work, and the amounts are roughly equivalent to such a yearly stipend, except we do it through a massively bureaucratic and inefficient benefits system. The number of different benefits, allowances, pensions, grants and loans available from the state is now too many to count. All of these are administered separately, applied for separately, and have their own set of eligibility criteria (ie. being unemployed, old, disabled, having children etc.), which obviously costs an absolute fortune. However, when it comes down to it, only one criterion really matters, and it's the one they all have in common: being on a low income.
The beauty of a NITS system with a guaranteed minimum income, implemented in this way, is that you get not only a vastly simplified means of directly redistributive tax (as in tax credits), but the ability to dismantle the entire apparatus of assessing unemployment benefit, state pension, incapacity benefit, student loans, child allowance... the cost savings of rolling all these separately administered benefits into one straightforward mathematical equation would be simply astronomical. Nobody falls through the net, working is always be more financially rewarding than not, and all the money is automatically and fairly recouped through the tax system from those who can best afford to pay.
Now, tell me that prospect isn't exciting.
Monday 19 October 2009
Wednesday 16 September 2009
How not to do tax credits
I've mentioned before about tax credits, how one third of claims made end up being overpaid, resulting in the unfortunate recipients having to repay money they thought they were fully entitled to, and have probably already spent, what with being poor and all. In fact, as a further 1/3 are conversely underpaid by the system, what's significant is that the people for whom tax credits actually work as they are supposed to are very much in the minority.
But hey, the system is a nightmare in practice, we all knew that already surely? So let's look at the idea in principle, then. Wealth redistribution, in other words taking money from the rich, who can afford it, and giving it to the poor, who need it, is to my mind a pretty fine idea. And doing it directly and transparently through the tax system seems a pretty fair way to do it, too.
But seriously, if you were asked to come up with a way of doing this, could you have ever designed a more clumsy, inefficient or convoluted system than the one which the Labour government, under Gordon Brown as chancellor, managed to create?
One of the key aims of tax credits, according to the governments own spiel, was to relieve the tax burden on low-paid, but otherwise "hard-working families". Fair enough, it has long seemed unfair that low-income workers, already earning scarcely more than they would receive in unemployment benefits, continue to have their meagre pay further diminished by taxation. This, though is the government's elegant solution to the problem:
First, the employee pays their tax as normal. Then, to claim it back, all you have to do is fill in a complex form detailing how much you earn, to make sure you are eligible for a tax credit. Send this off to HM Revenue (bearing in mind that they already know how much money you earn, because you've just paid tax on it), and if you qualify, they start making payments to you.
However, you're not home and dry yet, because you have to promise to inform the Revenue immediately of any changes to your work situation, because if you start to work more hours, or receive a payrise, then the amount you are eligible to receive may go down (again, bear in mind that they will already know this, because you'll be paying more tax). If you fail to inform them immediately, or sometimes even if you do, you can end up being overpaid. Even if it's not really your fault, or you can't afford it, the Revenue will demand that you repay it, and treats the money owed with the same seriousness as they would unpaid tax.
So, in summary, people have to pay tax, then provide the government with information they already have in order to claim it back. One third of people, some but not all of whom have neglected to inform the government of changes which they were already aware of, will have claimed too much money, and the revenue will then proceed to claim it back from them. Hardly a paragon of efficiency, is it?
Of course, getting the government to even admit that the scheme has failings, let alone do anything to change it, is going to be extraordinarily difficult, given that the minister responsible for the creation of this monstrous system, and it's biggest fan, is Mr G Brown.
But hey, the system is a nightmare in practice, we all knew that already surely? So let's look at the idea in principle, then. Wealth redistribution, in other words taking money from the rich, who can afford it, and giving it to the poor, who need it, is to my mind a pretty fine idea. And doing it directly and transparently through the tax system seems a pretty fair way to do it, too.
But seriously, if you were asked to come up with a way of doing this, could you have ever designed a more clumsy, inefficient or convoluted system than the one which the Labour government, under Gordon Brown as chancellor, managed to create?
One of the key aims of tax credits, according to the governments own spiel, was to relieve the tax burden on low-paid, but otherwise "hard-working families". Fair enough, it has long seemed unfair that low-income workers, already earning scarcely more than they would receive in unemployment benefits, continue to have their meagre pay further diminished by taxation. This, though is the government's elegant solution to the problem:
First, the employee pays their tax as normal. Then, to claim it back, all you have to do is fill in a complex form detailing how much you earn, to make sure you are eligible for a tax credit. Send this off to HM Revenue (bearing in mind that they already know how much money you earn, because you've just paid tax on it), and if you qualify, they start making payments to you.
However, you're not home and dry yet, because you have to promise to inform the Revenue immediately of any changes to your work situation, because if you start to work more hours, or receive a payrise, then the amount you are eligible to receive may go down (again, bear in mind that they will already know this, because you'll be paying more tax). If you fail to inform them immediately, or sometimes even if you do, you can end up being overpaid. Even if it's not really your fault, or you can't afford it, the Revenue will demand that you repay it, and treats the money owed with the same seriousness as they would unpaid tax.
So, in summary, people have to pay tax, then provide the government with information they already have in order to claim it back. One third of people, some but not all of whom have neglected to inform the government of changes which they were already aware of, will have claimed too much money, and the revenue will then proceed to claim it back from them. Hardly a paragon of efficiency, is it?
Of course, getting the government to even admit that the scheme has failings, let alone do anything to change it, is going to be extraordinarily difficult, given that the minister responsible for the creation of this monstrous system, and it's biggest fan, is Mr G Brown.
Monday 17 August 2009
The price of health
I see US President Obama is running into trouble over his proposed national healthcare reforms. It seems many Americans are very opposed to a government-run insurance scheme, or seemingly anything that involves more public money going into healthcare. This is all very interesting from a British perspective, as our public-funded system was founded in 1948 on the principle of free, universal healthcare for all, and has stayed remarkably true to that ideal over the years.
The NHS has come to be regarded as something of a national treasure, and for many people the idea of a system that relies on private health insurance, such as in the US, is almost beyond comprehension. We take it for granted that the NHS will always be there for us if we were to need it, whereas having to pay for our medical treatment in such a situation is, for us, almost as unthinkable as having to go without treatment if we could not afford it. Whilst some people do pay for private healthcare in the UK, I suspect that even they view it as something of a luxury, and are reassured to think that should their fortunes change, they could still get a thoroughly decent standard of service for free on the NHS.
Americans, it seems, would probably not be satisfied with thoroughly decent. Their system allows for more choice, at least for those able to afford healthcare at all, and they are very reluctant to give that up. There is something in the American mindset that demands the very best service, the very latest technology, the newest drugs; good enough, for them, is simply not good enough. In fairness, they are generally prepared to pay for it, as evidenced by how the US actually spends 16% of it's GDP on healthcare, compared with 8.4% in Britain. Surprising figures, which show not only that Americans are willing to pay top dollar for top class service, but perhaps also that the NHS is not as inefficient as you might think.
Of course, the majority of the money going into the US healthcare system comes from the private sector (insurance companies, employee healthcare plans, private individuals), but even so 47.2% comes out of public spending, mainly on the government-run Medicare and Medicaid insurance schemes that cover the elderly, veterans, some disabled people and certain qualifying low-income groups. So, as a proportion of GDP, the US and UK governments spend roughly the same amount of taxpayers' money on healthcare. For that, the US get a system that allows 46 million people to go without health insurance, while a further 25 million are considered under-insured for their needs. That's around 23% of the population who could potentially be faced with the choice between going untreated, or paying for treatment which they can't afford. Meanwhile, for around the same money, Britain gets a universal healthcare system which is guaranteed free at the point of use. And that's without the massive extra spending that Americans put in privately.
The two systems on either side of the Atlantic could hardly be more different, ideologically and practically, so direct comparisons are often difficult. But, when looked at in terms of sheer value for money, it does seem that we get a pretty good deal. And that is something that I would have thought the American taxpayer would appreciate more than almost anyone.
The NHS has come to be regarded as something of a national treasure, and for many people the idea of a system that relies on private health insurance, such as in the US, is almost beyond comprehension. We take it for granted that the NHS will always be there for us if we were to need it, whereas having to pay for our medical treatment in such a situation is, for us, almost as unthinkable as having to go without treatment if we could not afford it. Whilst some people do pay for private healthcare in the UK, I suspect that even they view it as something of a luxury, and are reassured to think that should their fortunes change, they could still get a thoroughly decent standard of service for free on the NHS.
Americans, it seems, would probably not be satisfied with thoroughly decent. Their system allows for more choice, at least for those able to afford healthcare at all, and they are very reluctant to give that up. There is something in the American mindset that demands the very best service, the very latest technology, the newest drugs; good enough, for them, is simply not good enough. In fairness, they are generally prepared to pay for it, as evidenced by how the US actually spends 16% of it's GDP on healthcare, compared with 8.4% in Britain. Surprising figures, which show not only that Americans are willing to pay top dollar for top class service, but perhaps also that the NHS is not as inefficient as you might think.
Of course, the majority of the money going into the US healthcare system comes from the private sector (insurance companies, employee healthcare plans, private individuals), but even so 47.2% comes out of public spending, mainly on the government-run Medicare and Medicaid insurance schemes that cover the elderly, veterans, some disabled people and certain qualifying low-income groups. So, as a proportion of GDP, the US and UK governments spend roughly the same amount of taxpayers' money on healthcare. For that, the US get a system that allows 46 million people to go without health insurance, while a further 25 million are considered under-insured for their needs. That's around 23% of the population who could potentially be faced with the choice between going untreated, or paying for treatment which they can't afford. Meanwhile, for around the same money, Britain gets a universal healthcare system which is guaranteed free at the point of use. And that's without the massive extra spending that Americans put in privately.
The two systems on either side of the Atlantic could hardly be more different, ideologically and practically, so direct comparisons are often difficult. But, when looked at in terms of sheer value for money, it does seem that we get a pretty good deal. And that is something that I would have thought the American taxpayer would appreciate more than almost anyone.
Tuesday 4 August 2009
Taxes: only squeeze those who can stand a squeezing
Last time I had a good old rant about how our tax system, even after 12 years of supposedly socialist government, still inexplicably favours the well-off. I think anybody would be right to share my anger at this, and in my opinion it is reason enough to disqualify any government, especially a Labour one. But how should it be fixed?
For starters, we need to redraw the tax bands to make the system truly progressive, not just the half-hearted attempt we have now. In times gone by, the average earner paid very little in tax, as one might expect. Today, it is the average earner who contributes the lion's share of tax revenue. Also, there are many people on pay that is a long way below average who really should not have to pay tax at all, yet under our system they do, and what's more, now the 10p tax rate has been abolished, they are paying it at the same rate as the average earner. And the 40% top rate of tax, supposedly aimed at high earners, comes in at a little over £30,000 a year, thus catching many people who could hardly be described as rich. 40% is too heavy on those people, yet not nearly heavy enough on the super-high earners who fall into the same category.
Thus the whole band system needs a drastic shift upwards. Those on low earnings should pay nothing, after all their meagre paychecks are barely enough for the basic necessities as they are. The average earner should pay some tax, but at a lower, more reasonable rate. In any case, as the vast majority of taxpayers inhabit this group, the percentage rate should not need to be very high to bring in big revenues to the treasury. Then, as we climb up the income ladder, whereby every pound earned becomes more disposable, the government can take progressively bigger slices of that pound. The comfortably well-off should still be allowed to enjoy the majority of their earnings, but once we get beyond comfortable and into the realms of the stratospheric earnings of bankers, top executives and professional sportspeople, then I would have no qualms in imposing a rate of 90% or higher. There comes a level, which I would call 'enough money for anybody', beyond which further increase to a person's wealth becomes at best pointless, and at worst obscene.
Of course, the myriad loopholes which the rich have traditionally been able to exploit must be closed. Anybody who earns an income from a job, business or investment in the UK must pay UK tax on that income, regardless of citizenship or country of residence; it really is as simple as that. Many business leaders warn against higher taxes or more robust collection measures, lest all our top businesspeople desert Britain for other countries. Personally, I'm minded to call that bluff, and even if some do leave, I say let them go. Such grasping individuals are hardly the kind of people we want running our powerful commercial organizations, and besides, the UK is a massive consumer market, and nature abhors a vacuum. If they don't want to do business here, then someone else will fill the gap, you can guarantee it.
This is pretty radical reform I'm calling for here, but really all that is needed is a little political will. The gap between rich and poor is the single biggest global problem as I see it, and this would go a long way towards halting the UK's shameful slide in the wrong direction on this issue. And the thing is that it isn't really a big organizational task, the solutions are simple, we just need a government that is prepared to carry them out. Labour have shown that they have no real interest, which is frankly despicable given the supposed values upon which people have based their support for them. The Tories have always been ideologically opposed to high taxation for the wealthy, so while I can't accuse them of the same hypocrisy, I know they will be no help. Could a liberal government do it? Perhaps, if they were brave enough to be truly different...
Next time, what to do about tax credits.
For starters, we need to redraw the tax bands to make the system truly progressive, not just the half-hearted attempt we have now. In times gone by, the average earner paid very little in tax, as one might expect. Today, it is the average earner who contributes the lion's share of tax revenue. Also, there are many people on pay that is a long way below average who really should not have to pay tax at all, yet under our system they do, and what's more, now the 10p tax rate has been abolished, they are paying it at the same rate as the average earner. And the 40% top rate of tax, supposedly aimed at high earners, comes in at a little over £30,000 a year, thus catching many people who could hardly be described as rich. 40% is too heavy on those people, yet not nearly heavy enough on the super-high earners who fall into the same category.
Thus the whole band system needs a drastic shift upwards. Those on low earnings should pay nothing, after all their meagre paychecks are barely enough for the basic necessities as they are. The average earner should pay some tax, but at a lower, more reasonable rate. In any case, as the vast majority of taxpayers inhabit this group, the percentage rate should not need to be very high to bring in big revenues to the treasury. Then, as we climb up the income ladder, whereby every pound earned becomes more disposable, the government can take progressively bigger slices of that pound. The comfortably well-off should still be allowed to enjoy the majority of their earnings, but once we get beyond comfortable and into the realms of the stratospheric earnings of bankers, top executives and professional sportspeople, then I would have no qualms in imposing a rate of 90% or higher. There comes a level, which I would call 'enough money for anybody', beyond which further increase to a person's wealth becomes at best pointless, and at worst obscene.
Of course, the myriad loopholes which the rich have traditionally been able to exploit must be closed. Anybody who earns an income from a job, business or investment in the UK must pay UK tax on that income, regardless of citizenship or country of residence; it really is as simple as that. Many business leaders warn against higher taxes or more robust collection measures, lest all our top businesspeople desert Britain for other countries. Personally, I'm minded to call that bluff, and even if some do leave, I say let them go. Such grasping individuals are hardly the kind of people we want running our powerful commercial organizations, and besides, the UK is a massive consumer market, and nature abhors a vacuum. If they don't want to do business here, then someone else will fill the gap, you can guarantee it.
This is pretty radical reform I'm calling for here, but really all that is needed is a little political will. The gap between rich and poor is the single biggest global problem as I see it, and this would go a long way towards halting the UK's shameful slide in the wrong direction on this issue. And the thing is that it isn't really a big organizational task, the solutions are simple, we just need a government that is prepared to carry them out. Labour have shown that they have no real interest, which is frankly despicable given the supposed values upon which people have based their support for them. The Tories have always been ideologically opposed to high taxation for the wealthy, so while I can't accuse them of the same hypocrisy, I know they will be no help. Could a liberal government do it? Perhaps, if they were brave enough to be truly different...
Next time, what to do about tax credits.
Monday 27 July 2009
Tax doesn't have to be taxing. So why is it?
It seems to me that the tax system is one of the most important ways that a government interacts with its people. So what does our tax system say about the relationship between citizen and state in the UK?
Here are some widely acknowledged, and some lesser-known facts:
1 The poorest members of society pay a larger proportion of their income in tax than the richest.
Of course the richest do tend to pay more tax in absolute terms, but then the more money you have, the more you can stand to lose before it affects your quality of life to any real degree. Our system supposedly understands this, because income tax is progressive; whereby higher incomes attract higher tax rates. How do poorer people still end up paying more? Two factors: firstly, VAT, because everyone has to buy things, the rate is a single flat rate (currently 15%) and it does not, in contrast to its original intention, only apply to luxury items. Secondly, evasion and avoidance, which is much more possible if you are wealthy, as you have the means to travel, to employ experienced accountants, and often have less clear cut forms of income (eg share income, which comes under capital gains, rather than income tax).
2 In 2006 there were eleven prosecutions for income tax evasion, as opposed to almost 100,000 prosecutions for TV license evasion.
You've seen the adverts. So much as think about not paying your TV license and we will know instantly, and our enforcement squad will be down on you like a ton of bricks. What's more, it's true, a huge number of prosecutions are made, and the vast majority are successful. You'll likely also have seen similar adverts for benefit fraud. So you'd imagine then, that if people were evading income tax, the consequences would be similarly harsh. Wrong. HM Revenue and Customs are remarkably reluctant to prosecute those they suspect of tax fraud. The main difference is that tax fraud cases are often complicated, often marginal because of the myriad loopholes in the system, and the people responsible tend to be wealthy, possessed of expensive lawyers and are very determined to fight their corner. Of course, the majority of TV license cases are clear cut under the rather draconian law, and the evaders are almost always poor, ill-educated and unlikely to put up more than a token defense.
3 Under the Tax Credit system, 1/3 of the money available goes unclaimed. And of the claims that are made, 1/3 are overpaid.
Tax credits are a form of direct redistribution taxation, ie taking money from the wealthy and giving it directly to the poor. But why does the system require people on low incomes, the very people it is supposed to help, to pay their taxes first, before claiming back the money as tax credit? The one-third of people who do not claim are not only losing out on the extra money they are entitled to, but are not being refunded the taxes that they should never have paid in the first place. And even of those who are aware of the system, and have the time and inclination to fill in the forms correctly, one-third receive overpayments. HMRC are very fastidious in making sure that this money is repaid, in fact, in their eyes it is treated the same as unpaid tax. In truth, though, it is often their error, and the unfortunate recipient has often spent the money they received (understandable, given that they have been paid it in good faith, and being poor after all, could scarcely afford not to).
So what does this say about Britain? Simple. There is one rule for the rich, and quite another for the poor. If you are rich you can expect to pay less tax, even if you do not indulge in a little light evasion, and if you do, you need not worry about getting caught. If you are poor, then you have no power to do anything about it, so we will screw you for as much as we can get away with. We will rely on many of you not even claiming tax credits to balance the books, and if you do claim, by god you better play by the rules, and even if you do that we may take the money back off you, even if it's our mistake.
This, then is the reality of our Labour government. They do not stand up for the poorest in society, the truth is they are just as scared and mesmerised by the rich as any Tory government, if not more so. So, my question is this: who truly holds the power in Britain? The people with the democratic mandate, or the people with the huge pile of cash?
Next time: how the tax system should work.
Here are some widely acknowledged, and some lesser-known facts:
1 The poorest members of society pay a larger proportion of their income in tax than the richest.
Of course the richest do tend to pay more tax in absolute terms, but then the more money you have, the more you can stand to lose before it affects your quality of life to any real degree. Our system supposedly understands this, because income tax is progressive; whereby higher incomes attract higher tax rates. How do poorer people still end up paying more? Two factors: firstly, VAT, because everyone has to buy things, the rate is a single flat rate (currently 15%) and it does not, in contrast to its original intention, only apply to luxury items. Secondly, evasion and avoidance, which is much more possible if you are wealthy, as you have the means to travel, to employ experienced accountants, and often have less clear cut forms of income (eg share income, which comes under capital gains, rather than income tax).
2 In 2006 there were eleven prosecutions for income tax evasion, as opposed to almost 100,000 prosecutions for TV license evasion.
You've seen the adverts. So much as think about not paying your TV license and we will know instantly, and our enforcement squad will be down on you like a ton of bricks. What's more, it's true, a huge number of prosecutions are made, and the vast majority are successful. You'll likely also have seen similar adverts for benefit fraud. So you'd imagine then, that if people were evading income tax, the consequences would be similarly harsh. Wrong. HM Revenue and Customs are remarkably reluctant to prosecute those they suspect of tax fraud. The main difference is that tax fraud cases are often complicated, often marginal because of the myriad loopholes in the system, and the people responsible tend to be wealthy, possessed of expensive lawyers and are very determined to fight their corner. Of course, the majority of TV license cases are clear cut under the rather draconian law, and the evaders are almost always poor, ill-educated and unlikely to put up more than a token defense.
3 Under the Tax Credit system, 1/3 of the money available goes unclaimed. And of the claims that are made, 1/3 are overpaid.
Tax credits are a form of direct redistribution taxation, ie taking money from the wealthy and giving it directly to the poor. But why does the system require people on low incomes, the very people it is supposed to help, to pay their taxes first, before claiming back the money as tax credit? The one-third of people who do not claim are not only losing out on the extra money they are entitled to, but are not being refunded the taxes that they should never have paid in the first place. And even of those who are aware of the system, and have the time and inclination to fill in the forms correctly, one-third receive overpayments. HMRC are very fastidious in making sure that this money is repaid, in fact, in their eyes it is treated the same as unpaid tax. In truth, though, it is often their error, and the unfortunate recipient has often spent the money they received (understandable, given that they have been paid it in good faith, and being poor after all, could scarcely afford not to).
So what does this say about Britain? Simple. There is one rule for the rich, and quite another for the poor. If you are rich you can expect to pay less tax, even if you do not indulge in a little light evasion, and if you do, you need not worry about getting caught. If you are poor, then you have no power to do anything about it, so we will screw you for as much as we can get away with. We will rely on many of you not even claiming tax credits to balance the books, and if you do claim, by god you better play by the rules, and even if you do that we may take the money back off you, even if it's our mistake.
This, then is the reality of our Labour government. They do not stand up for the poorest in society, the truth is they are just as scared and mesmerised by the rich as any Tory government, if not more so. So, my question is this: who truly holds the power in Britain? The people with the democratic mandate, or the people with the huge pile of cash?
Next time: how the tax system should work.
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