Britain’s bewildering tax system needs fixing

A major taxman’s blunder was an inevitable result of our tax code, says Mark Littlewood

The extraordinary inability of Her Majesty’s Revenue and Customs to accurately process tax returns raises serious questions about the entire taxation system in Britain. Early indications are that the wrong lessons are being learnt.

One is that HMRC may be given centralised control over employee’s pay cheques. As ever, the bureaucrats’ solution to a string of embarrassing administrative failures is to seek to give themselves even wider reaching powers.

Those who believe our taxation system will run more smoothly by entrusting revenue and customs officers with greater responsibilities aren’t merely barking up the wrong tree. They are in completely the wrong forest.

The country doesn’t just need lower taxation; it needs a more comprehensible tax system. Very often the public and political debate focuses exclusively on the former, while the latter is overlooked. But the tax code should now be a priority for the Government if it is serious about getting public finances under control and cutting back on red tape.

Early this year, an IEA research paper showed that with over 8,000 pages of primary legislation – in very rough terms about six times the length of War and Peace – Britain has the longest tax code in the world. For those inclined to believe that other Western European countries are always more bureaucratic than Britain, it was worth noting that the German and French tax codes weigh at a comparatively modest 1,700 and 1,300 pages respectively.

It may be a little over-optimistic to expect the tax system to be able to be written in plain English on a single side of A4, but the jaw dropping complexity of the present rules is testament to a departure from any form of basic common sense. The bewildering, impenetrable nature of the regime is great news for accountants and lawyers and, of course, swells the ranks of the state bureaucracy. But the rest of us are condemned not merely to hours of confused form filling, but to very real costs.

British businesses spend around £20billion per annum not on paying taxes, but merely on complying with taxation law. In the vast majority of developed countries, the cost of tax compliance is falling, but that’s not so here. And the burden falls disproportionately on small businesses, which pay around 16 times as much as large corporations as a proportion of turnover.

We need to make tax easy to understand and simple to collect. If the Government is tempted by an administrative solution, no doubt backed up by some ghastly new IT project at HMRC, they will be falling back into all the sorts of traps that landed us in this mess in the first place.

This article originally appeared on The Daily Telegraph website on September 8th 2010 and can be viewed here.

3 thoughts on “Britain’s bewildering tax system needs fixing”

  1. Posted 09/09/2010 at 13:06 | Permalink

    “If you are so drawn to it, just try to go in despite my veto. But take note: I am powerful. And I am only the least of the door-keepers. From hall to hall there is one doorkeeper after another, each more powerful than the last. The third doorkeeper is already so terrible that even I cannot bear to look at him.” These are difficulties the man from the country has not expected; the Law, he thinks, should surely be accessible at all times and to everyone.”
    -Franz Kafka, “Before the law”

  2. Posted 09/09/2010 at 18:57 | Permalink

    I suspect that merging the Inland Revenue with Customs & Excise was a big mistake, as the latter’s unpleasant culture has begun to dominate the former’s.

    But the main problem is not merely administrative: it is political. Total taxes are too high (as a proportion of national income). This brings pressure to complicate the system (a) to counter avoidance and (b) to provide ‘relief’.

    The coalition government’s rhetoric has been surprisingly radical so far, though the proof of the pudding will be in the eating.

    We urgently need a similar radical approach towards reducing and simplifying taxation. A single flat rate of income tax would be a good start.

  3. Posted 09/09/2010 at 19:52 | Permalink

    As DRM says, single flat rate taxes are the way forward – that makes people realise how much they are paying (and has the least distortions). As it happens, flat rate taxes on land or property values* are vastly better than flat taxes on income (for a variety of reasons), but any combination of the two will do me.

    * Yes of course there’ll have to be exemptions, discounts or deferments for pensioners. But that’s a political thing, not an economics thing.

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