By Meakin, Rory
Review - Institute of Public Affairs , Vol. 64, No. 3
Australia's tax system is better than Britain's, says Rory Mea kin - but it's still in dire need of reform.
Australia's tax system has its problems. Too complicated, too many special allowances and specific taxes, and too much money drained out of the pockets of working Australians. But things could be worse. Australia could have the British tax system, instead. Imagine a system that imposed tax rates on labour income which, when you add them all up, are as high as 66 per cent.
In Britain, standard income is subject to four rates of income tax while dividend and savings income each have a separate schedule of rates on top of a separate tax on company profits and capital gains tax. Labour income is also subject to an additional deceptively-named tax called national insurance which is assessed weekly rather than annually and levied separately on both employers and employees, with different rates and thresholds and classes for each. It all adds up to punishing overall rates.
The rules are covered in a set of tax accountancy guides called Tolle/s. By 2010-11, the combined number of pages had ballooned to 17,795, three times higher than in 1997. The Byzantine complexity implied by those numbers imposes considerable costs on businesses and individuals in the UK. It prompted the TaxPayers' Alliance to join with the Institute of Directors in 2010 to form the 2020 Tax Commission to review the entire tax code with a view to proposing a rational system designed from first principles, but which is nonetheless politically realistic.
The final report, The Single Income Tax, launched in May, proposes a very radical yet necessary change to how the government raises taxes, aimed at making the system cheaper, fairer and more legitimate.
The cost of complexity goes beyond the need to employ more experts to understand more rules and conditions, although since 1996 membership of Britain's Chartered Institute of Taxation has grown every year from 10,115 to 15,400 in 201 1. The perception of almost impenetrable complexity means opportunities are not exploited because it is hard for people to assess just how complex the tax system is. This leads them, rationally, to err on the side of caution and expect the worst. So they assume the rules will be at the worst end of their estimation of how complex and costly the tax code could be, just to be safe. People price in the risks associated with their ignorance on tax matters when contemplating potential projects.
In addition, complexity has led to the tax system having lost legitimacy as many people do not even really understand how much tax they should pay, let alone how much others should pay. That opacity, a direct consequence of complexity, inevitably leads many to suspect others of not paying their fair share.
In 2009, The Guardian reported that Barclays paid tax of 'just one per cent of its 2009 profits'. Subsequent analysis showed that the pre-tax profit figure used was that of the global Barclays Group rather than the bank's UK operations, which was compared against tax paid on UK profits. It was also inflated by including the sale of Barclays Global Investors, a type of gain expressly exempted from the company profits tax rules to avoid tax distorting restructuring decisions. Once these two mistakes alone are corrected, an effective tax rate of over 23 per cent emerges, much closer to the then headline rate of 28 per cent. Too bad. By the time corrective analysis had been released the damage to the legitimacy of the system had already been done.
The more evidence we heard and the more research and modelling of the system we did, the more we came to see that tax neutrality had to be the key mechanism to achieve the radical simplification needed. How an individual earns an income should not affect his liability for tax on that income. One hundred dollars should be worth the same to the payee whether it is received as salary, dividends or interest. The total income of an individual determines his ability to bear the burden of tax, not how that income is labelled. …