Saturday, October 14, 2006

Three cheers for the bureaucracy?

I suppose that I'm just putting off the evil moment, but I'm in the midst of marking some candidate application forms for a Candidate Development Day tomorrow, and I need a break.

It is therefore mere coincidence that I take this opportunity to talk about tax. When I started working for the Inland Revenue, nearly twenty years ago, late in the second Thatcher government, the memory of 98% tax rates for individuals was still raw in people's memories and there was a feeling that rates were too high and that government didn't provide value for money. And, from a liberal perspective, it was true. I suspect that very few people believed that their taxes were used effectively and there was a genuine feeling that smaller government was not only necessary but imperative.

Over the years, Her Majesty's Inland Revenue changed radically, with work transferred out of London in the late eighties (exit PAYE), delayering (the stripping out of mostly superfluous management layers), more work transferred out of London (self-employed taxpayers) in the late nineties and then amalgamation of offices in the early part of this decade. There were less of us, but with new technology and better systems, we coped. A much simplified personal tax system also helped, with the abolition of the 50%, 60% and 83% rates, as well as the investment income surcharge.

Alright, the introduction of reliefs designed to encourage investment and savings were a minor irritation, but the mass of tax legislation didn't seem to increase that much, and one could keep up with things.

Enter a Labour government in 1997. I freely admit that talk of an ethical foreign policy, enhanced constitutional rights and greater devolution of powers was very seductive (not enough for me to actually vote for them, heaven forbid...) but they were an attractive enough alternative to a rather tired Conservative Party (the cones hotline, anyone?). Little did I realise what was to come though...

As Chris Huhne pointed out recently, the weight of Butterworth's, the leading tax reference tome, has increased by 50% in just nine years. Whilst Gordon Brown might mean well in terms of reducing poverty, and I genuinely think that he does, in terms of creating a system that the average company director or self-employed professional can understand is concerned, he has been a complete failure.

Now if you intend to increase tax revenues, you are likely to be unpopular, and I do blame the Conservative Party of the eighties for their successful campaign to convince the public that tax was bad and public servants were generally feckless and ineffective for that. So Gordon has had to be rather sly about how he has done it. For example, the introduction of quarterly instalment payments for corporation tax by large companies improved the government's cashflow, but passed pretty much unnoticed (and why should large companies pay their tax bill on an estimated basis as much as fifteen months before their smaller competitors anyway?).

The problem with such 'backdoor' tax measures is that they have to be drawn up in a comparatively complex form to escape attention (financial journalists are fairly lazy in my opinion) and thus create voluminous text.

But what bothers me most is the apparent failure to understand the implications of their actions. When the 0% rate band for corporation tax was introduced, my colleagues and I predicted a huge surge in the number of limited companies set up, as the tax advantages were so obvious (yes, we're civil servants, we have no comprehension of the profit motive, right?...). Combine that with the dividend rate for individuals (tax is credited at 10%, but if you're a basic rate taxpayer, we don't charge you on the difference between 10% and the basic rate - another Labour introduction, in Gordon's first budget), and the attraction of going 'limited' is clear.

The resultant loss of tax revenue was also obvious, at least to anyone who actually gave the question a moment's thought. So, what did our perspicatious government do? Of course, introduce a special tax rate for non-corporate distributions (dividends paid to individual participants) to block that. Did they advertise this innovation to small businesses? Like hell they did... Did it cause chaos because nobody really understood it and there was no way to really police it? It surely did. An answer was clearly needed and it quickly came. Abolish the 0% rate band and return the position to exactly what it was before the rate band was introduced...

So who might have profited from this? Ah yes, our gallant friends in the accountancy profession. Is it my imagination, but as our numbers have dropped, haven't the numbers of accountants increased? And does that enable HM Revenue & Customs to fight tax evasion on equal terms? No, I don't think so...

I firmly believe in the concept of a tax system that is simple, enables the taxpayer to have a pretty good idea of why they owe what they do, and encourages enterprise (or, at the very least, stays as out of the way as possible). Tax is said to be the price we pay for a civilsed society, and I generally support that notion, but it also needs to be seen as a price worth paying.

In Brighton, the Liberal Democrats talked seriously about tax for the first time in recent memory, talking about taxing pollution rather than work, lifting the poorest out of the tax system altogether and avoiding punitive tax rates. I know that Labour haven't got the gumption to have such a debate (people might not agree, although the leadership will ignore them anyway) but I rather hope that if the Conservatives are serious about being a party of government, they'll join the debate about how the taxation system should be used in a modern society. It involves taking some tough decisions about the role of government, and David Cameron and his friends don't appear keen yet, but the longer it takes to engage, the longer it will take to change the way government works. And change is badly needed...

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