A revamp of the uk's tax system is overdue, but is a one-size-fits-all regime the answer or will it just cause more issues?
The more you earn, the more tax you pay. It's as simple as that. But there could be benefits for all levels of society, including the wealthy, if a flat tax system were introduced.
Flat tax advocates say that simple one-rate-fits-all tax systems encourage economic growth, boosts Government revenues and cuts down on avoidance. The opposition say they are unfair to the poor. Whatever the rights and wrongs, a simplified tax system would make life easier.
A radical wave of simple taxation has swept over former Soviet states. Prompted by Estonia in 1994, a number of countries, including Russia, followed with single rates of income tax and few of the concessions and allowances that make the British tax system so complex.
While each system differs, the basic concept is simple. Under a flat tax regime, one tax rate applies to all, irrespective of income levels or sources. A substantial personal allowance takes the poorest earners out of taxation altogether.
The purist models developed by economists aim to "tax all income once, and once only, as close as possible to source", said Andrei Grecu, author of the Adam Smith Institute report Flat tax - the British case.
Similar systems also exist for business taxation. The once-only rule avoids complications such as the double taxation of dividend income at the corporate and personal level, leaving the whole system far cheaper to administer.
Western politicians have taken note. German chancellor Angela Merkel championed flat tax in her election campaign, only to drop it when the issue became a vote loser.
In the UK, the Liberal Democrats recently proposed abolishing higher rate pension contribution relief, while initial Conservative enthusiasm for flat taxes appears to have waned. Gordon Brown remains defiantly against, despite documents from his own department allegedly showing large benefits for the UK economy.
Flat taxes are nothing new and were common throughout Europe up to the 19th century, until progressive systems took over to pay for social programmes. Hong Kong adopted flat tax in 1947, followed by Guernsey in 1960.
In contrast, Britain's hefty tomes of allowances, rates and exceptions provide ample feeding ground for those looking to avoid tax and those who are willing to help them.
Brown's recent loophole clampdowns have made things worse. As a result, the tax planning bible, Tolley's Tax Guide, has swollen from 4,000 to 9,000 pages in recent years.
It is hardly surprising that many bewildered investors hand their tax affairs to experts. They could face an array of income tax and national insurance contributions bands, VAT at three different rates including 0%, corporation tax, capital gains, stamp duty at various rates for different assets, motoring taxes such as MOTs and the congestion charge, council tax and business rates.
On the investment side, there are advantages to Isa, old Peps and Tessas, benefits to holding trusts and, of course, the intricacies of pensions.
The sheer complexity leaves most unsure of how much tax they really pay. The situation suits HM Revenue & Customs, said Gabriel Stein, chief international economist at Lombard Street Research and author of Tax Freedom Day, which shows how long each of us has to work for the tax man before we get to keep our earnings for ourselves.
Since Labour came to power in 1997, the tax take has risen from 40.3% to 42.6%. In monetary terms, tax revenue has doubled since 1995 from £255bn to £496bn said Stein.
Inconsistency, stealth taxes and allowances all alter the way we spend and save, he said, adding: "Taxes should be as little distortive as possible and flat tax is less so than graduated ones. In Britain, changes in the tax system are at the whim of the Chancellor of the day. In other countries with flat tax systems, changes tend to require agreement by all parties. They are more transparent so they have to be more honest."
Attempts have been made over the years to simplify and cut back on tax legislation. For example, stamp duty, first introduced in 1694 no longer applies to hats, dice, gloves, insurance policies and hair powder.
But, as with A-Day, simplification often leads to more complexity because transitional rules and exemptions are forced into play. The Revenue's current Tax Law Rewrite programme shows just how convoluted simplification can be. A recent draft legislation paper ran to 192 pages and only covers specific elements of corporate tax.
Stein believed there is a case for a new system in the UK, but politicians remain unwilling to tackle the issue. "You can construct a tax neutral take system, but high earners will be winners so you have to demonstrate the longer-term advantages to everyone," he added.
Instead, he said we will cling to a system that creates uncertainty, where changes to advanced corporation tax and national insurance, just two recent examples, are not clear cut.
Wealth managers and advisers like the flat tax concept, believing it will focus decisions on investment and lifestyle, rather than tax avoidance.
Tom McPhail, pensions research manager at Hargreaves Lansdown: said: "I admit I got rather seduced by the idea, until others convinced me it only works in less developed emerging markets. The UK tax system is bewildering complicated and especially in pensions, everybody from Adair Turner down admits it needs change."
The problem lies not with the concept of simplification, but with change itself. Existing contributors would want to retain promised benefits and Government tax departments, advisers, product providers and administrators would struggle to cross to a heavily revised system.
John Cullinane, tax partner at Deloitte and president of the Chartered Institute of Taxation, agreed: "Tax breaks for savings, Peps, Isas and even more so for film relief, are often tied to particular providers and inevitably that causes problems if you try to alter things."
For investors, he said the 'tax tail' still wags the dog, pointing to pages of investment advertising advising investors to "beat the tax man". At governmental level, every successive chancellor faced with the option of a small quarter percent cut in income tax or a big tax break elsewhere will always chose the latter option.
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