The government needs to lift the squeeze on the private sector partly by revising its tax strategy. It should introduce a 20% Capital Gains Tax rate instead of the 28% of the 2010 budget. This is likely to yield more revenue than the current higher rate.Treasury figures show CGT revenue falling in 2012-13 by £500 million when we have the first full year impact of the higher rate.
It should cut the Corporation Tax rate to 20%, to take the UK lower than most of the the western rival locations for inward investment. There will be some revenue loss for a the first two or three years, but thereafter there should be compensation from the additional jobs and profits located here to tax.
It should return Income Tax to the top rate of 40% imposed by the last Labour government for most of its term. This like the CGT change should increase revenues.
The government needs to tell the Revenue and Customs to stop hounding small and medium sized firms and entrepreneurs. There has been a big increase in reported fishing expeditions or enquiries into anyone who earns above average and has some business interests. Very often the enquiries are worrying and time consuming for the taxpayer, only to result in agreement that everything has been properly declared and accounted for.
To have a strong private sector led recovery the government has to impose fair taxes fairly. It needs to set competitive tax rates, at least vis a vis the higher tax advanced countries. That way the UK can keep more business here, and attract more business here. That way as well we can get some of the many serial entrepreneurs who are on strike back into creating businesses and jobs. There is a lot of successful entrepreneurial talent in this country sitting idle with cash to invest. They need positive signals that they are wanted and they will be allowed to keep a decent proportion of anything they make.
More people should be taken out of Income Tax altogether, to cut the tax and benefit merry go round on lower incomes. It is cheaper to let people keep more of what they earn, than to take it off them in tax and then give some of it back in credits and benefits. These tax changes taken together should mean the rich pay more the poor pay less.
I am glad Mr Clegg likes the John Lewis model of employee ownership and participation. It would be good if the government revisited policies, to promote everyone an owner. That will require more and better tax breaks for equity participation in the business you work for.
January 16, 2012
Recessions should provide opportunities for new entrepreneurs as ‘negative growth’ drives out mal-invested organisations.
The new entrepreneurs would bring new ideas, efficiencies and standards, based on the new realities.
However, despite the risible tweaks in recent budgets, the red tape and taxes that apply to startups and the banks’ refusal to lend to viable businesses (due to their having to recapitalisation rules), it is hard to see how any entrepreneurs can emerge in the current politico-economic climate.
What do red tape, excessive taxes and lending problems have in common? Government interference, of course.
Will government get out of the way and set the spirit of enterprise free?
Not while we’re hog-tied to the EU, it won’t.
January 16, 2012
Osbornes piece in the DT is riddled with EU this EU that. He has made sure that most sentences demonstrate Britain as part of the EU… As a committed member of the EU Britain will….
He forgets the line Britain will not grow while tied to EU bureaucracy and EU taxation and spending.
January 16, 2012
Even though this same bureaucracy applies to Germany and hasn’t hindered its growth in any way.
The problems faced by small businesses are mainly caused by UK law, not EU law because the Government does not provide these businesses with enough support.
January 16, 2012
Drivel. If only all the EU rules applied equally to all- ie CAP etc etc.
January 16, 2012
Utter nonsense.
I don’t need any government support to run any of my businesses I just need my unneccessay costs due to taxes and excessive regulation to be reduced by politicians stop taking my money and then offering some of it back if I run my business their way
January 17, 2012
Exactly
January 16, 2012
Is there an IOD or an IEA report which provides more flesh behind these assertions?
January 16, 2012
Ms Hanson, Please explain your abbreviations for those of us who do not understand
January 16, 2012
Agree with the general thrust here, though even lower percentages would be better! Why bother to invest money or labour when most is taken by the government. Until that changes, I will make do and spend more time on other interests.
Zorro
January 16, 2012
Zorro
Your thoughts are my thoughts.
2 years ago I decided to wind my construction business down slowly and retire a little earlier than planned.
Not nearly enough in the retirement pot, but decided that lack of business, squeezed margins, and the worry and requirement to work harder and longer for less personal reward made my mind up.
The Company is still on the books ( official returns are completed) it still has some money in the bank, but simply does not seek to trade anymore.
I may trade on a very small scale if I find an interesting project that will give me satisfaction and a sensible margin, but as far as I am concerned at the moment, I have now retired.
Risk -reward simply not worth the bother and all of the hastle any more, at least for me.
January 16, 2012
How true. We had a Country House Hotel. No longer worth trading…
January 16, 2012
Agreed, if 20% CGT is better than 28%, why is 10% not better than 20%?
Just from a standpoint of simple logic it would seem that if you make CGT 20% you need to mke income tax the same to avoid a bunch of taz avoidance schemes being created as people call income a capital gain.
Just had the pleasure of listening to Mr Clegg’s speech this morning (laid up with man-flu if you were wondering), total dog’s breakfast of attacking the elite (of whom he is clearly one) and vague ideas that the Lib Dems will be in some way ‘fairer’ than anyone else. The sort of nonsense you would expect from a sixth-former.
January 16, 2012
Single acts
Mr Cleggs income (and many from Parliament) does not rely upon them designing, making or selling any competitive product or service, so why are we surprised whe most of them talk rubbish.
January 16, 2012
I seem to recall that CGT was raised because people were abusing it to get around paying higher tax rates.
January 16, 2012
Well he did study social anthropology at Robinson College Cambridge so I suppose that is what you would expect. Libdems just say what they think will be popular – they never expect to actually have to do it. It is hard to get out of the habit it seems.
January 16, 2012
He has absolutely no experience of running a business and neither has his wife. Both are professional aparatchiks living off a government wage.
So that makes him a real expert in the world of finance and how to run a company. I am waiting for the Book by Nick Clegg: “Twenty ways to improve your business skills.”
January 17, 2012
Capital gain of 20% after inflation might be OK anything more is counter productive. 28% without allowing for inflation is just counter productive theft.
January 16, 2012
Indeed I agree fully the current high rates are counter productive. Revenue inquiries often launched at random are a huge distraction to (often very time pressured) businesses and people and distract them hugely from the far more important activity of preserving jobs.
The tax system is absurdly complex and most revenue staff, in my experience, do not really fully understand it themselves, let alone the poor taxpayers.
January 16, 2012
I do so agree with your views on taxation. The last government did two very bad things. First of all, it more or less promised that income tax would not be touched. Also it started imposing all sorts of obscure taxes which are, I understand, very hard to understand – volumes and volumes of them.
This needs sorting out fast.
Lots of the trouble with the lefties in the St Paul’s area is down to unfair income tax.
January 16, 2012
Nice idea but completely out of tune with the Government’s rhetoric, esp the Lib Dems”. All the talk is of the ‘undeserving rich’, the need to close tax loopholes and get the rich to ‘pay their fair share’. You are quite right about the damage caused by this approach, but only a radical overhaul,with huge simplification and dramatic lowering of rates will achieve the objective. Until then politicians will compete for the populist vote by talking, absurdly, about the need to tax even more as the solution to the debt / spending problem.
January 16, 2012
Why not flat tax? No loopholes, no concessions and no surcharges.
January 16, 2012
20/20 is a GREAT IDEA.
THE REAL PRIZE IN THE ECONOMY IS THE HUGE GLOBAL SAVINGS that are currently stored up and waiting to investment. There are many,many trillions held in low interest savings accounts aronud the world. The Chancellor needs to attract that money when the upswing starts !!!!
That should be HIS NUMBER ONE GOAL !!!
We need to start looking 3 years ahead to the other side of the upcoming EURO crash.
January 16, 2012
I thought the idea was to keep the money sitting petrified in savings accounts earning 1% for as long as possible, so it can be inflated away to help all the poor folk on the other side of the equation with a dozen mortgages to service (and governments who need to roll over vast debts)?
January 16, 2012
Cameron could do all of the things you suggest but of course Nick Clegg and the Lib Dems won’t let him. It would seem our ‘Liberal’ Prime Minister is more than happy to let the tail keep wagging the dog, jumped up little tail it is at that.
January 16, 2012
A very logical, simple, and sensible set of ideas John.
Only a couple of things I would add, there should be some indexation on Capital Gains, say 2% reduction per year, thus after holding an asset for 10 years any profit becomes in effect tax free.
Savings interest should also be paid, tax free.
Your suggestions plus the two above, should certainly help make a difference.
January 16, 2012
In Germany I understand that the ten year rule applies to capital gains on property. You get hammered for tax until the time is up – in theory. Haven’t put it to the test yet. Another 8 years to go on the investment there.
January 16, 2012
The tax system is far too complicated, and appears to be designed to punish effort and provide non jobs at the tax office rather than maximise revenue.
A simple flat rate fair to all and easy and cheap to administer would be the way to go.
We could then save billions on unnecessary jobs at HMRC.
January 16, 2012
This site offers a lot of penetrating analysis and many good ideas, however, I fear that most of the views expressed here are very much in the minority. This government, like its Labour predecessor, appears to believe that more government action is the solution, while I guess that many people on this site believe that more government is the problem.
It is depresssing that more than half a century after Friedman and others showed that increased government led to decreased individual freedom, it is still necessary to keep restating the message that much governement activity is ineffective and often counter productive. Interestingly, those governments that adopted Freidmanite liberalising ideas, such as the abolition of exchange controls and privatisation prospered while those where the state controlled much of the economy floundered. Yet, despite the wealth of theoretical and practical evidence available recent UK governments seem wedded to an interventionist model that would not have looked out of place in 1970s Britain.
Who, apart from a handful of backbench MPs, is making the case consistently and eloquently for less government in the face of a population generally hostile to even modest reductions in public spending, let alone the significant reductions needed to energise the private sector?
January 16, 2012
Positive suggestions, how will this effect finances in early years assuming its effect is positive in the 3rd/4th year?
Given we have a highly developed avoidance industry, having taxes rate the same between income tax and CGT and small companies would reduce the need for avoidance at source. Indeed why worry about CGT when most are being financially raped by QE/ZIRP, council tax and array of other charges loading onto to basics.
We need to incentivise work by eliminating National Insurance as a tax on labour.
We need to increase personal allowance and reform the mess of benefits and taxes into a coherent system which encourages marginal economic activity over welfare dependence.
Should we not decide what the level of taxation needs to be as a monetary amount and then within a principle driven tax framework as for HMRC to set forward efficient and simple ways to achieve it within the framework.
I am sorry but until we have as a country started to regulate better with respect to banks & offshore activity. High pay in public and private sector.The EU, Euro and trillions of debt. Continued mass immigration with no coherent strategy to incentivise local labor participation will not address the issues facing the most people at the sharp end.
Where are the moves to equalize pension treatment in the private and public sector,why not have a public worker scheme for all, open to private employees to which all contribute equally per the scheme rules.
I am afraid i lack trust – not only in the ability, but in the allegiance and loyalty of our parliament and leaders to the UK interest and democracy.
January 16, 2012
Spot on … include dividend income .. infact all income.
Then tax based on income bands.
Double the tax free threshold.
Scrap NI over 5 years – start in the old industrial regions
Property tax to replace stamp
VAT on all products
And commit to reducing taxation to 35% of GDP
January 16, 2012
Another change that is desperately needed is the removal of National Insurance.
It is completely disingenuous to call this Insurance, and is fundamentally wrong on two counts.
The First is that Employers should not be taxed for every employee that have. It is non nonsensical and makes employing people expensive.
The Second reason is that Employees already pay tax, and clearly NI has been used as a cheap political ploy to pretend that Labour didn’t increase income tax. The 40 pence band is actually 52% and the 50% rate is actually 62%. It is a DISGRACE.
Companies pay tax already, and employees pay tax already, so what is the point in trying to con the electorate and make the economy unproductive.
If you want economic growth, then this is where to cut….
January 16, 2012
I don’t know if JR is aware of this, but an increasing number of SMEs are electing to become LLPs to become more tax efficient. 13.8% NI on employees is a major factor in this. A business making reasonable profits can recoup the cost of changing their status within six months. Bad news for State tax receipts.
January 16, 2012
Winston
Agree someone who we know is planning to do exactly as you say.
Problem is that the government is constantly moving the goalposts on almost anything so a sensible decision today looks silly in a few weeks time !
January 16, 2012
Anyone earning over £844 per week only pays 2% NI; so the 40% band is actually 42% and the 50% band is 52%.
Given that employers pass the cost of NI onto their employees it’s no different than any other tax.
January 16, 2012
Er How exactly do employers pass on the nearly 14% ENI (uncapped) that we pay on each employee?
January 18, 2012
There are three ways.
1) Determine how much money you have available for an employee’s salary and reduce it by 14%. As long as this amount isn’t below minimum wage the difference between the employee’s salary and the money available will be sufficient to pay the 14% ENI.
2) If an employee’s working week is 37.5 hours by making them work 5 hours 15 minutes per week (1 hour 3 minutes per day) as unpaid overtime the amount not paid is equivalent to the 14% ENI. Basically the employer makes employees work 42.75 hours per week but only pay them for 37.5 hours.
3) A combination of both methods.
January 16, 2012
John,
It has been commented on this site before how lower taxation will help the economy on many occasions. Lib Dems are against it. Sweden Gibraltar and other countries have ontroduced lower taxation with great results in lower unemployment and increasing tax collection.
Simon Hughes this weekend was still complaining that capping welfare at £26,000 would bring more children into poverty and the LibDems will resist the changes. He and his stupid party are living on anther planet to the rest of hard working taxpayers. There are many hard working families who do not receive an income of £26,000 gross, let alone net. Like Clegg, he is clueless how to help the fortunes of the country’s economy or society. LibDems want more taxation, more welfare, more EU. Cable continues as if he is totally anti-business. Again, tangling with bankers last week. LibDems need to be put in their place as a minor activist party, and if at all possible got rid of ASAP.
January 16, 2012
The pro-European stance of Osborne in his piece to the DT makes me suspicious he is paving the way for the summit next week and for Britain to throw away more money to the lost cause of the EU and a U turn on the veto that never was.
How Cameron has the cheek to say Scotland wants a “neverendum” after his stance on Europe and a in out vote for Britain defies belief. Especially as Clegg stated he would give a better referendum than the Tories on in out of Europe. If both parties were agreed to the referendum what are we waiting for?
January 16, 2012
More people should be taken out of Income Tax altogether, to cut the tax and benefit merry go round on lower incomes. No. It needs to broaden the tax base and reduce the rate. Trouble is we have got ourselves into a redistribution box where benefits deigned to lift incomes have the effect of simply increasing the cost of living, especially housing – both rental and purcahse. Better to work to phase out most benefits and broaden the tax base, as unless you pay tax why should you bother to vote or feel a sense of ownership of government. Plus claimants become part of the client state. For the avoidaance of doubt I include in ‘claimants’ all the various tax breaks and subsidies to business and similar.
January 16, 2012
Quite right. All income should be taxed to overcome the widespread belief that there is a money tree somewhere.
January 16, 2012
John, you know the tax rate is not 20% or 40% or 50% – everything we buy attracts VAT, making the marginal rate of tax 40%, 60% or 70%. So no surprises that the economy is stagnating.
I also think that honest numbers like this will prevent the repeated mantra of Labour and the media that taxing more and spending more is the answer!
How about personal income tax of 10, 20 and 30%. Surely as proven again and again, recently by Reaganomics and Thatchernomics, and against the advice of Mervyn King and 500 ‘economists’, this will provide the shot in the arm that the UK so badly needs?
By the way, I am delighted to see George Osborne travelling the world boosting trade. The less exposed we are to the bankrupt, blind, communist EU the better!
Reply: The overall average tax rate is 38%
January 16, 2012
” …overall average is 38%..” All together at the back there – ‘Oh no it isn’t!’ The ASI and the TPA have tax freedom day at somewhere about 6 months. That is it takes you half the year to pay for goverment, or rather the tax take is about 50% of income. Only it isn’t – it is 100% of income. Look at it this way. You go to work on Monday knowing you have to earn a hundred quid to pay the bills. And you do this by lunchtime. But now you find you’ve got to work all afternoon to earn another hundred quid to pay for the bloated state and all its tax consuming employees and their pensions and the client state. It’s a giant theft scheme.
January 16, 2012
Commulibdemism bankrolled by capitalism.
January 18, 2012
38% but in addition you also have the cost of getting to and from work and other work costs (child care etc) that are not tax allowable – plus all the unpaid time you have to put in to do your tax returns and the money the government is borrowing to waste will have to be paid back too by taxpayers eventually. Also the legal/regulations & restrictions that force you to work inefficiently and so earn less.
January 16, 2012
JR: “I am glad Mr Clegg likes the John Lewis model of employee ownership and participation. ”
While I agree it may be a good thing to encourage share ownership, the Clegg proposals as reported on the BBC last night – admittedly not the ‘go to’ source for accurate information – made me think ‘Enron’.
January 16, 2012
Cleggy’s a twonk. He’s starting in on ‘central planning’ again. Just the thing that failed in 1945, 1989, 2008 etc etc
January 17, 2012
lola: “Cleggy’s a twonk. ”
You are too kind to him.
At first glance his proposals fail on the first law of investing, be diversified. (Ok that is my first law.)
And if you don’t take enough interest in the stock market, which most people don’t, then put your money in tax free savings accounts. Over fifty years you can still get a quite respectable return if you keep an eye on the interest rate.
January 16, 2012
Cut income tax to the same level as Corporation tax and Capital Gains tax
Then we’ll see how many accountants and bankers that have cunning wheezes to avoid taxes become unemployed. It also means that Bliar and Brown will also have to decide which ‘tax’ to pay to appear to remain ‘legal’.
Get people to pay Tax at the same and fair level.
Flat taxes for everyone, disparities in levels create an industry of iniquity and envy.
January 16, 2012
Agreed!
January 16, 2012
Agreed. Are there any estimates of the cost to the economy arising from our over complex and evasion/avoidance incentives tax system? If not why not?
January 16, 2012
These are the sorts of first steps to recovery I would expect from a Conservative Government led by a Conservative.
January 16, 2012
“return Income Tax to the top rate of 40%”
Why are there threshold at all? I would hope that the tax office, software providers and anyone using a spreadsheet could write a formula. If the conversation is one about optimising tax revenues by adjusting rates and thresholds wouldn’t having smooth functions be much easier.
And perhaps total tax paid could actually go down at a high level, for example rather than income tax vs. earnings being monotonic (as it would be even for a flat rate) its actually non-monotonic ..! That may well encourage some growth.
January 16, 2012
My recent dealings with the tax office AND THEIR SOFTWARE PROVIDERS would indicate that they are incapable of dealing with anything as complex as a spread sheet! Having recently retired from a life in the IT industry (and been responsible for some of the largest global networks) , I am appalled by the poor standards of IT services available from the IR for the simple act of tax collection. What hope for any informed reform?!
January 17, 2012
OK. That is a sad, but perhaps convincing argument.
January 16, 2012
Surely, before anything sensible can be set in train for doing as you suggest, first and foremost someone needs to reduce the thousands of pages of tax legislation, rules etc to something simple enough for everyone to understand. Currently not even those who work for HMRC, let alone a struggling business man can possibly understand the sheer volume of legislation.
Still, I suppose it keeps an awful lot of people in work, checking the checkers who check the checkers to see if anyone has made an error in their returns….
January 16, 2012
Who put the money in to John Lewis Partnership if the workers don’t have to buy the shares and don’t get to sell them when they leave? Is it a bank conglomerate or a pension fund, some organisation must have bought it out of receivership. Who chooses the Directors or Chief partners? Or is this just a glorified bonus scheme and if the business made a loss would they be expected to pay it? Are they jointly liable for the debts of the partnership?
If this is being held up by the likes of Clegg and yourself John I think we should know the structure of your ‘ideal’ and how one sets one up from scratch?
Reply: I am arguing for more employee share ownership, not for the JL model
January 16, 2012
These are good suggestions. The arithmetic is compelling. Present tax levels are a disincentive to earn and to invest. Lower tax rates on earnings demonstrably work. Coupled with the removal/simplification of Brown`s thicket, and ill thought out, of tax credits and benefits they should reduce the cost of tax administration too.
January 16, 2012
For me a key item is to raise considerably the point at which you start to pay income tax.
Those on lower levels of pay should not be paying income tax on a levels of earnings which if paid as benefits by the state would be paid tax free.
And it must be cheaper overall to do it this way than use tax credits to then top up earnings.
January 16, 2012
I have just heard a Government advert on the radio, warning people of the dangers of falling down stairs. Contact the State website for advice. I thought this nonsense and waste of money was being cut? Apart from a bit of tinkering around the edges and Michael Gove’s initiatives, we have the same socialists running the State. Vote blue, get red.
January 16, 2012
Just heard two more: “put your cigarette out, fire kills” and “don’t leave your engine running, people might get asthma”.
I am waiting for “see how we waste your money, visit ….gov.uk”
January 16, 2012
Update: “give motorcyclists a second thought”.
Labour took State advertising to record levels, I think about £300m. Have the Coalition cut it?
January 16, 2012
This all stems from the establishment over the past 10 years of an army of ineffective jobsworths whose sole purpose in life is to produce endless twaddle to keep themselves employed. They are there because they are there, just as is a similar army of jobsworths in the EU commission, whose ranks they no doubt one day hope to join for even more remuneration and better pensions…
OT, I see our government is complying with yet another an EU directive, this time on motorcycle licensing. Newcomers next year will have to take a succession of expensive courses and tests separated by years, with limitations on the engine capacity of their ‘bikes (restricted power) etc and, soon, all will have to wear hi-viz clothing on a ‘bike. Sensible training is of course essential, but the hideously complex, time consuming and expensive systems being brought in courtesy of the EU is pure discrimination against a specific segment of the people and will adversely impact on the UK ‘bike market. Put this into the context of a 17-year-old with a rich father being able to pass their car test and the same day blast off in their Dad’s supercharged 150mph car, and it makes little sense.
January 16, 2012
Back on to territory we don’t agree on. “Should do this”, “should do that” – how about something more precise? How about linking to some actual evidence? I’m sure some impartial think tanks not linked to the Tory party (or any other for that matter – I’m thinking the IFS for example) have done some studies. Why not cite them? I’m talking in particular about the usual, same old same old claim about the 50% top rate.
I thought you were all about fiscal prudence, shrinking the size of government, getting it to stop borrowing more than it can afford? Well, cutting tax is a sure way to get the government borrowing less. Cutting tax based on a hunch you have, informed only by prejudice and no evidence, is not exactly sensible, prudent, wise government use of the purse strings.
Reply: the CGT and Income Tasx Laffer effects are no hunch. Previous posts here have set out the historical evidence from the UK and US to show how it works. I cited Treasury figures showing how the higher rate is cutting revenue for CGT.
January 16, 2012
While I agree with your views regarding Capital Gains and Corporation Tax, perhaps reducing the latter to 10% for true UK based manufacturing companies, we need some more fundamental tax reforms.
Take the latest child benefit debate, the government should do away with it. Take the child benefit budget, reduce it by 20% and then distribute that, as an increased personal allowance for every one, on the basis that every tax payer has one child.
This raises the problem that people paying 40% tax get more than 20% basic rate tax payers. So make another easy but fundamental reform to income tax. Calculate the tax due on the gross income then deduct a free tax allowance. On the current figures the free tax allowance would be 20% of £7475 = £1495. This would rise to about £1810 with redistributed child benefit.
If redistribution was politically impossible then add £1055 to the free tax allowance of every tax payer who actually has a child, again on the basis one child per tax payer.
The free tax allowance approach makes negative income tax possible and ultimately a Citizens Income approach. It makes focusing of allowances much more precis and is fair and equitable to all wage bands.
Next is to combine income tax and national insurance. This simplifies the tax structure and does away with the entitlement culture of “I have paid my NI all my working life”.
This combining of income tax and NI would also apply to the self employed and possibly pensioners. I do not see why people with larger pensions should not pay the same tax rates as everyone else. This would spread the tax burden over a greater proportion of the population, essentially lowering taxes to all.
Finally we should move to a flat rate tax of say 32%.
January 16, 2012
One very useful thing to do which won’t actually cost a penny is to enshrine in law an unequivocal statement that retrospective taxes are unlawful and absolutely WILL NOT be imposed at all, ever.
The reason for making such a statement is that it would appear that companies dealing with the North Sea oil/gas fields are scaling back exploration and innovation in favour of a wait & see policy. This is very likely down to the UK Government’s previously demonstrated enthusiasm for acting like roving bandits and confiscating profits which they deemed to be excessive. All such behaviour does is forces companies to not make excessive profits in front of such rapacious idiots.
This propensity towards windfall taxation may also be making the shale fracking pioneers cautious in the extreme; that and the planned expenditure on the HS2 project. What businessmen are seeing right now is a government which seems to have forgotten that it has a structural deficit and which is busy back on the old “spend like a drunken sailor” path; at some point in the future it’ll wake up feeling skint and look round for someone to nick wealth off. In such circumstances, looking poor is a very good idea, but the net effect is to make the entire country the poorer.
January 16, 2012
Spot on. The coalition is following socialist policies promoted by the LibDems.
January 16, 2012
CGT is no longer a tax on gains. It is a swingeing tax on the realisation of long held wealth. The first reform that is needed to it is to restore proper indexation relief, so that people can invest for the long term not the short term. There does need to be a suitable anti-avoidance element that prevents income being translated to short term gains to reduce liability. Beyond that, there should be incentives in the form of lower rates.
Perhaps too we need a special temporary CGT discount on sales of BTL property: the wealth tax effect is discouraging sales that would otherwise take place in an undistorted market, in turn keeping rents and housing benefit payments, and the size of mortgages and house prices artificially high.
CGT revenues are highly volatile. They peaked at £7.9bn in 2008/9 – paradoxically after markets had passed their peak – simply because it was clear that Darling was making a “special offer” to crystallise gains at lower rates, knowing that it would bring a lot of tax forward. In 2009/10, revenue collapsed to £2.5bn. It increased again in 2010/11 to £3.6bn – again simply because it was obvious that whichever party won the election they were going to increase CGT savagely, so gains were crystallised early to preempt the new regime. Lurches in CGT policy greatly increase uncertainties for investors, and make investment in the UK unattractive. If the CGT regime is to work, it must be stabilised – which would require cross party agreement not to tamper with it once it has been properly optimised to provide suitable economic incentives.
January 16, 2012
If you are aiming to reduce the tax paid by employers then corporation tax is the wrong target. The same tax reduction could be achieved by reducing employers national insurance contributions. This has the following advantages:
1) It reduces the tax payment early in the business cycle and in doing so helps the cash flow problem from which all companies suffer.
2) It reduces the cost employing staff and in doing so hopefully inceases employment thus reducing the numberof people receiving benefit.
3) If promoted properly it will increase the attractiveness of the UK for inward investment in the same way that a reduction in corporation tax would do.
4) It should reduce the cost of exports and give home produced products an advantage over imports.
January 16, 2012
John there are several problem with your ideas.
Firstly most entrepreneurs do not have large amount of cash to invest simply because to get large amount of cash you need to already have a successful business or a high paying job. Most entrepreneurs have low levels of capital and start their own business because they have the skills required (hairdressing, brick laying, web design) and wish to be their own boss. Those who do have large amount of cash to invest are generally large companies seeking to expand. Currently these large companies are hoarding cash because of the crisis in the Eurozone and are unlikely to spend it until the market is more stable.
Secondly while the Corporation Tax rate is 28% for most companies there is a small profits rate of 21% for companies that makes less than £300,000 per year. So if Corporation Tax rate is reduced to 20% for everyone this will give larger companies a large tax cut but will only give a small tax cut to smaller companies. Thus by removing a competitive advantage enjoyed by small companies this will make it harder for small businesses to compete against larger ones; making it harder for entrepreneurs to start their own business.
Corporation Tax rates
http://www.hmrc.gov.uk/rates/corp.htm
Thirdly removing the 50% tax rate won’t help entrepreneurs as most of them don’t earn over £150,000 and most will never earn anywhere near that amount of money. While this will reduce the taxes paid by executives of large companies there’s no evidence that this will result in them creating more jobs. It’s also unlikely to attract business people to this country as there are many countries with much lower tax rates, such as Dubai with its 0% tax rate.
Fourthly there’s no guarantee that the revenue lost from tax cuts will be compensated by the additional jobs and profits. If growth isn’t sufficient this could result in a loss. The Government will need to monitor the effect carefully and end these tax cuts if growth doesn’t materialise in the short and medium term.
Fifthly the tax system is one of the reasons why businesses are attracted to a country but it’s not the only reason. Levels of employee education and training, the cost of energy, transportation, and local regulations are also important. I’d recommend identifying which types of company would employ the most people in the UK, then offer these companies tax incentives to attract them; as opposed to tax breaks for everyone.
January 16, 2012
Blimey
That’s quite a sensible post for you. Mostly wrong. I’m speaking as an entrepreneur, owner of SME’s and a business dragon/start up angel.
Oh by the way if you own more than one small company the lower rate of corporation tax is halved, even if one business makes no profits at all.
January 17, 2012
Can you please expand on why you feel my post was wrong.
Do most entrepreneurs have large amount of money to spend on new businesses? If entrepreneurs have the necessary capital why is the low availability of banks loans a problem for new businesses?
When you say corporation tax is halved do you mean that you only have to pay 11.5% corporation tax if you have multiple small businesses?
Do most entrepreneurs earn over £150,000?
Is the tax system the main reason why companies choose to create a branch in another country?
January 16, 2012
How about reclaiming our tax sovereignty not only by rejecting the financial transaction tax but more importantly by getting wrid of carbon dioxide taxation and credit schemes ?
This carbon dioxide taxing rubbish has been foisted upon us by the EU and global banks as yet another ruse to transfer money from the little people to the elites who will then use it against the little by establishing a one world government with it .
January 16, 2012
When the 50% rate is scrapped, make sure to get rid of the erosion of the personal allowance at GBP 100,000 as well – in effect, that’s where the 50% rate starts.
January 16, 2012
Dear Mr Redwood,
What are your views on a flat rat tax for those above the threshold for those who are above the threshold for tax?
Reply: I like the idea of flat rate tax on incomes, as did Mr Osborne in opposition. I am not arguing for its current introduction for a variety of reasons.
January 16, 2012
And, those reasons are?
Reply: A long story for another day
January 16, 2012
Oh, dear! Trying to palm me off? You could, of course reply to me privately? Others like I might be interested in your views?
January 16, 2012
Fair points and a good one on taking the lower paid out of tax instead of taking then giving back in benefits – a labour solution.
They also need to get serious about dismantling the nanny state telling us what to do and spending goodness knows how much, not just talking about it – then we could pay even less tax.
Do the people in the treasury read this blog?
reply: If they do not, they are told about it.
January 16, 2012
Sir
I very much enjoy your column and today’s 20/20 is unfortunaltey too logical for this government though spot on.
Switching to another subject which is close to the heart of Daniel Hannan. He likes to mention how the UK should leave the EU (he quotes it costs the Uk 19 billion a year and severely limits fishermen, farmers, small businesses etc) and join EFTA. Nowhere do I see a cost comparison between being in the EU (thankfully not the Euro) and being a member of the EFTA. Might this be a subject worth covering? I’m all in favour though for some reason many politicians and the Civil Service of this country only seem to see the self benefits in the future when they can sup off the long spoon of the EU bureacracy. And one other thing, why oh why does the UK not suspend its payments to the EU until such time as their accounts have been passed by auditors, 17 years now of not being signed off and yet the Government does not consider it wrong? If a UK company submitted non audited accounts to the Treasury year on year would the Treasury happily accept them without question? Are there no rules they are meant to follow?
Reply: Yes, it is a good topic – it seems obvious that membership imposes all too many costs on current terms.
January 16, 2012
I don’t know much about tax and how it effects businesses, but I do know that Corporation tax is way to high in this country. In fact I noted the other day the EU wants uniform Corporation Tax which would make Ireland increase it’s I think it’s 12%. That’s how it got business to invest in Ireland so much. We should aim for that. How we will be able to though with the EU making laws and expecting us to obey them, while many of the EU states simply ignore most rules to suit themselves. Until this country gets the millstone from round its neck we will be restricted from growth and enterprise, that millstone is getting heavier by the day with taxes. Its time we excited, but it’s getting our government to do it, who ever takes that step will have the nation on their side. As for low taxes for the lower paid, yes, I agree with that, it makes jobs more accessable and pay enough to live on.
January 16, 2012
The net result of Corporation Tax in our Company is that £100K which would otherwise be spent on productive machinery and another employee ends up as Corporation Tax. Our business is sound and profitable in manufacturing engineering parts but is unwilling to borrow from dodgy banks to expand, so we just use (after business rates, employee wages, NI, Corporation tax) retained profits.
January 16, 2012
In principle, Mr Redwood, your plan must be right.
But how to get there, are how to make it stick?
What tends to happen is that each Labour Government puts up income tax and/or National Insurance rates and every Conservative (led) Government since Mr Heath has raised VAT rates in order to cut (or avoid raising) income tax.
So we get a ratchet effect. Income tax/cgt rates yo-yo up and down but VAT and National Insurance keep going up.
The only way I can think of to avoid this ideological merry-go-round is to establish some kind of formal common tax interest between rich and poor.
We need a Rooker-Wise type convention that the maximum tax and benefit withdrawal rate at the bottom end should always be equal to the maximum tax and allowance withdrawal rate at the top.
If that could be agreed, we might encourage a drive towards lower maximum tax rates and some stability when we get there.
January 16, 2012
Mr Clegg might like the John Lewis model.
He might also like the numpties purporting to be Conservatives in the 301 Committee. Perhaps they should defect to the Lib Dems.
Surely they don’t think the Tories lost the last election because they were too Tory ???
January 16, 2012
… and what if the Tory party DID lose because of being ‘too Tory’ ?
What of standing for principles rather than populism ?
January 16, 2012
All good ideas and should be done but the main restraint on growth is governmentk regulatory parasitism & the secondary restraint is the 50% of GNP taken by parasitic government. Firing most nuclear regulators, housing “planning” regulators and H&S regulators would be a good start. Stopping preventing the building of nuclear plants would be a good follow up. With growth, tax rates can be cut and we can still end the deficit.
January 16, 2012
Good ideas there, just don’t want to see any more stealth taxes in the budget.
They hurt some UK industry sectors, take no account of ability to pay tax like income tax does.
I can imagine a UK 20% Corp Tax would give Sarkozy a fit!
January 16, 2012
N.Clegg was an MEP and so he must try to retain his EU pension rights. They will be removed if he goes against the EU.
This applies to many others I am afraid.
BobE
January 16, 2012
I’m very much in favour of taking low earners out of tax altogether, and simplifying the byzantine tax and benefits system. I suspect that the whole shooting match has become something of a make-work scheme to take an army of pen pushers off the jobless registers.
January 16, 2012
Mr.Redwood, your proposals are quite moderate and would likely raise revenue. If only the Chancellor could be persuaded to give them a try!
Longer term, the ambition should be to abolish National Insurance. It is not practical to merge Income Tax and NI without creating losers or introducing enormous complexity – the only way to deal with the issue is abolition. This would also make the opaque IR35 regulations irrelevant. Part of the revenue could continue to be raised by a simple payroll tax on employers.
Also we should not lose sight of the intention to increase the Inheritance Tax threshold to £1m. This pernicious tax destroys the capital built up by people of modest incomes, which if left in the private economy would be the seedcorn of countless new businesses. It also operates in an arbitrary way depending on whether you live long enough for your tax planning to work in the way intended. As well as the increased threshold, I would like to see a reduction in the Inheritance Tax rate to 20%.
January 16, 2012
Thinking about it a bit more, if we had a payroll tax then HMRC would have to retain the IR35 regime, otherwise there is an incentive for employers to use self-employed staff and avoid the tax. The only solution is complete abolition of NI!
January 16, 2012
20/20 vision usually means being able to see what’s happening in a crystal clear way and by inference be able to predict the future well enough to create a consistent policy. Policy in all tax areas since 2007/8 has been a complete shambles.
1 Pension contributions on 1st April 2006 (A-day) were stabilised to a maximum £235K per year from memory, and maximum lifetime allowance of £1.8m, index-linked. This was supposed ot be the long term simplified solution to an irksome and complex issue. Darling took away the indexation element 3 years later, and reduced the maximum contribution limit. Osborne reduced the £1.8m to £1.5m and reduced contribution limit to £50k per year. How can anybody plan for the future?
2 CGT rates were index linked and 10%. The index linking was removed and the rate nearly trebled by the Conservative led government.
3 Capital allowances and Corpration tax rates for SME s have been wound up and down like a yo-yo by both Labour and Conservative governments.
4 NI rates have been ratcheted upwards without any contract. My house or car insurance tells me what I get in the event of an accident in return for my premium. NI doesn’t so can’t be classed as insurance.
The point I’m trying to make is that consistency in tax is as important as the rates themselves. Businesses won’t set up under rates which aren’t promised, in stone, for say 10 years minimum. There is too little trust that if a 10% Corporation tax rate, say, were to be agreed to encourage new businesses, the new companies would be sucked in and after 3 or 4 years rates would escalate to cream them. Solar energy companies who set up under the scheme last year have been suckered in and spat on by this government’s total volte face this year. Who is to say that all these “lucky” John Lewis style employees won’t have the gains from their hard work creamed off the minute they do well?
January 16, 2012
The government is not interested in business. How could it be when it is devoted, in the main, to strangling the life out of it? It is interested in MONEY. Lots of it. Plenty to spend on favoured client groups, plenty to pocket, and plenty to employ friends and colleaugues. If businesses fail – they just borrow it. If they can’t borrow it – they print it. Why do you think the state is now 55% of the economy? It’s the easiest, most sure-fire way to make a great living. Ask Kinnock, Mandelson, Prescott etc. etc.
January 17, 2012
A good idea in places like Eastern Europe where there tax evasion is rife and have you ever been to Russia? In the west the majority of people believe the rich should pay more and more of their income. Flat taxes may be advantageous to the poor, but not as much as the rich. The middle will loose out, but maybe you think this is good as an incentive to get more wealthy instead of just work, house, pub, and bed lifestyle? Lets face it what have these people ever done for the economy?
If you all think Russia, China and India are such beacons of taxation and the right level of social security and wages, go and live there. Lets see how you get on in these bastions of social justice.
Attacking the pirate ships of tax avoidance, here said to be about 70 billion which dwarfs the the one billion not paid out in means tested benefits and on a world scale 3 trillion in tax avoidance is necesary and right. We can start with the UK based ones. Oh yes we can. They have to say how high? Like Mr Redwood says about companies still wanting to sell to Britain. In the same way they will not want to be leaving if they are making huge profits and if they do, lets get someone to do the job cheaper and sack them, or they can sack themselves.
The lack of scepticism is I suppose what really irks me when the better off seek a handout, requesting charity for the rich. Scepticism and hostility is the response to trade unionists organising a similar tax cuts, increases in income and living standards for those on low and middle incomes. Many are robbed by an early grave. Their choice? Ram it.