Single income tax: Some say 'simpler', others say 'unfair'

A SINGLE INCOME TAX, proposed by the Taxpayers’ Alliance’s 2020 Tax Commission, is already splitting rooms.

Allister Heath, chairman of the commission and editor of City AM, heralded the move as one which will stimulate growth in a “stagnant” economy, create jobs, and create a tax system that is simpler and more transparent.

The aim, the commission says, is to remove tax as a decision-making factor by introducing a flat-rate tax at 30%, while also raising the personal allowance significantly, which in last year’s money would be £10,000, but could conceivably grow to the region of £12,000.

Marginal taxes, too, would fall in line with the £30% rate, with a single tax on labour and capital income, ultimately seeing the abolition of employee and employer’s national insurance.

Corporation tax and capital gains tax would also join national insurance on the scrapheap, with a single tax on capital income again set at that magic number of 30%. Transaction taxes including inheritance tax and stamp duty would also be ceased, while local authorities while be required to raise 50% of their funding locally.

The crux of the plan is to reduce the size of taxes and public spending to 33% of GDP, down from the current level of 48% at which we currently find ourselves.

The thinking is that a large state is cumbersome and impairs growth, and, as such, shrinking the size of the government and simplifying the system will lead to growth – an increase of 8.4% GDP, according to the commission’s figures.

Of course, removing tax as a motive in decision-making is a laudable ambition, as is bringing coherence and simplicity to the tax system, which by extension could bring further legitimacy with it. The very existence of the Office of Tax Simplification illustrates just how important that end is.

Not everyone sees these proposals that way, however. Indeed, its opponents see it as a way of getting the poor to subsidise the rich, while also expressing grave concerns about the integrity of the welfare state under the plans.

Critics of the commission – who include Tax Research UK’s Richard Murphy – say the abolition of taxes such as capital gains tax and inheritance tax would only benefit the wealthy, while branding the propositions for corporation tax “highly avoidable”.

They add that expecting local authorities to find 50% of their revenue locally – compared to the 20% they tend to take currently – is not only unrealistic, but would exacerbate the north-south divide and therefore deny vital services to the most impoverished areas.

Whether these proposals take on a more tangible form remains to be seen. In particular, political momentum is currently hard to gauge, although it is thought the plans will sit well with the Conservatives, given the TaxPayers’ Alliance’s links with the party, while the prospect of significant simplification a huge selling point. The public, though, will be a far harder sell.

If there is one benefit of the arrival of the Single Income Tax report, however, it is in provoking wider debate, and hopefully alternative suggestions, encouraging movement towards a simpler tax system. Few – and these must include those with a vested interest – would argue the weird idiosyncrasies present in the established system should not be removed.