The UK tax system. A friendly and informative debate…

[MattRat]

split from this thread: https://www.railforums.co.uk/thread...-helping-the-recovery-of-rail-traffic.228656/

As for where the 'lost revenue' would come from, perhaps we could get the rich to finally pay their taxes?

 

[A0]

As for where the 'lost revenue' would come from, perhaps we could get the rich to finally pay their taxes?

"The Rich" (whatever that means) already DO pay alot of taxes.

Suppose that once a week, ten men go out for beer and the bill for all ten comes to £100. If they paid their bill the way we pay our taxes, it would go something like this...

The first four men (the poorest) would pay nothing.
The fifth would pay £1.
The sixth would pay £3.
The seventh would pay £7.
The eighth would pay £12.
The ninth would pay £18.
And the tenth man (the richest) would pay £59.　
So, that's what they decided to do.

The ten men drank in the bar every week and seemed quite happy with the arrangement until, one day, the owner caused them a little problem. "Since you are all such good customers," he said, "I'm going to reduce the cost of your weekly beer by £20." Drinks for the ten men would now cost just £80.

The group still wanted to pay their bill the way we pay our taxes. So the first four men were unaffected. They would still drink for free but what about the other six men? The paying customers? How could they divide the £20 windfall so that everyone would get his fair share? They realized that £20 divided by six is £3.33 but if they subtracted that from everybody's share then not only would the first four men still be drinking for free but the fifth and sixth man would each end up being paid to drink his beer.　

So, the bar owner suggested that it would be fairer to reduce each man's bill by a higher percentage. They decided to follow the principle of the tax system they had been using and he proceeded to work out the amounts he suggested that each should now pay.

And so, the fifth man, like the first four, now paid nothing (a100% saving).
The sixth man now paid £2 instead of £3 (a 33% saving).
The seventh man now paid £5 instead of £7 (a 28% saving).
The eighth man now paid £9 instead of £12 (a 25% saving).
The ninth man now paid £14 instead of £18 (a 22% saving).
And the tenth man now paid £49 instead of £59 (a 16% saving).　
Each of the last six was better off than before with the first four continuing to drink for free.　

But, once outside the bar, the men began to compare their savings. "I only got £1 out of the £20 saving," declared the sixth man. He pointed to the tenth man, "but he got £10!"　
"Yeah, that's right," exclaimed the fifth man. "I only saved a £1 too. It's unfair that he got ten times more benefit than me!"　

"That's true!" shouted the seventh man. "Why should he get £10 back, when I only got £2? The wealthy get all the breaks!"　

"Wait a minute," yelled the first four men in unison, "we didn't get anything at all. This new tax system exploits the poor!" The nine men surrounded the tenth and beat him up.　

The next week the tenth man didn't show up for drinks, so the nine sat down and had their beers without him. But when it came time to pay the bill, they discovered something important - they didn't have enough money between all of them to pay for even half of the bill!　

And that, boys and girls, journalists and government ministers, is how our tax system works. The people who already pay the highest taxes will naturally get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy and they just might not show up anymore. In fact, they might start drinking overseas, where the atmosphere is somewhat friendlier.　

 

[MattRat]

"The Rich" (whatever that means) already DO pay alot of taxes.

I meant the rich that don't pay their taxes. Maybe I should have said something like the super rich. You know who I mean. Or at least, I hope so. And you know, I might be willing to talk about deals for them to stay around, if they actually paid their taxes in the first place.....

 

[GusB]

And that, boys and girls, journalists and government ministers, is how our tax system works. The people who already pay the highest taxes will naturally get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy and they just might not show up anymore. In fact, they might start drinking overseas, where the atmosphere is somewhat friendlier.　

Ah, but how did they become wealthy in the first place? Was it through their own sheer hard work? I do not hold a grudge against anyone who starts from scratch and builds a successful business, especially if they've come from small beginnings themselves. What I do have an issue with is when those people completely forget where they've come from.

What annoys me more than anything else is when people talk about "wealth creators"; just because you have a particularly successful business idea does not make you the creator of wealth - it's the people who help you along the way that create that income.

 

[A0]

What annoys me more than anything else is when people talk about "wealth creators"; just because you have a particularly successful business idea does not make you the creator of wealth - it's the people who help you along the way that create that income.

I think you're wrong - having the idea *and* being able to translate that into a succusseful business is a talent many don't have, but it *does* create wealth - the minute you start employing people and making a profit you are, by definition a "wealth creator".

To give an example - Clive Sinclair was a great inventor at a technical level - he wasn't a great businessman which is why his company always struggled. It took Alan Sugar to see the value of what Sinclair had invented and how to manfacture it effectively and build it into a successful business (I know Amstrad existed and was growing pre their acquisition of Sinclair).

Sugar started Amstrad by initially selling electricals from the back of a van and moved onto importing car radios and car aerials from the far east.

 

[tbtc]

I think that you certainly wouldn't build a new country's tax system to replicate the UK's current one, there are so many problems with it

But, at the same time, I'm frustrated by people who repeat simplistic three/four word phrases as the answer to everything ("tax the rich" being the one here)

The Government tried to bring all "benefits" under one umbrella with Universal Credit (to try to sort out the complication of lots of different payments that sometimes meant that you would lose more in benefits than you'd earn from taking on additional work, because your extra pound of salary would see cuts to multiple benefits), but there's no enthusiasm for a kind of "Universal Tax" - and with the rich being those who benefit most from the Status Quo (where they can pay a lower marginal rate of tax than their cleaners), I can't see it changing any time soon

What about some kind of practical ideas that would iron out a few of the "kinks" in the current system (given that you can have people with similar incomes who pay vastly different amounts in taxes, because of the different ways that some things are treated)?

For example:

• Give everyone a flat 30% "relief" on pension contributions. At the moment a low earner will pay a net 80p per pound of pension contribution that they make (given that they get tax relief at source, but only pay 20% income tax) whilst a high earner will only pay a net 60p per pound of pension contribution that they make (since they are paying 40% tax, so get more tax relief). Seems strange that we are giving high earners a significantly bigger tax break here, especially as that money could be used to give lower earners more of an encouragement to save
• 
  
• Merge Income Tax and National Insurance. We all know that National Insurance is just another tax, rather than specifically paying for your own state benefits. But at the moment someone earning £20k from a job pays a marginal rate of 32p per pound of income (20% tax + 12p NI), someone earning £100,000 pays a marginal rate of 42p per pound (40% income tax + 2p NI) and someone like a buy to let landlord pays a marginal rate of 20p (because you don't pay NI on this kind of income - meaning your landlord might be earning much more than you but paying much less in tax than you are).
• 
  
• Similar thing with other incomes - we allow (even encourage) people to treat incomes differently because we tax them differently - e.g. your business pays lower taxes than you do as a person - you can be mega rich but only pay 20% Capital Gains, so much better to filter things through that - we should really have one rate for all income (whether that's money you've earned in a job, share dividends etc)
• 
  
• Sort out the "contractor" / "self employed" situation properly - I can see why people set themselves up as a "business" and can then claim tax relief on "expenses" but it's created quite a messy situation that seems to penalise people who comply with the rules and the spirit of the rules (not blaming those who have exploited the situation, I'm blaming the rule makers here)
• 
  
• If we are going to base local council taxes on property prices then these need to be revalued - at the moment we are paying based on what houses were worth in about 1991 - and the rampant price increases since then mean a lot of mega-expensive houses aren't paying the share that they would pay if assessed today
• 
  
• Limit the amount (for tax purposes) that you can claim on interest payments to sister companies. There are a number of firms who have huge revenue but pay low tax, often this is because they have been set up to pay interest on "loans" from sister companies at exorbitant rates - e.g. I might have a firm turning over a million pounds a year but it's been "loaned" money at 20% by a firm I have in some dodgy tax haven, which coincidently swallows up any "profit" my business might have had, and therefore means I barely have to pay a penny to HMRC. This is how multinationals can pay lower tax than the "local" firms who are being squeezed out by them. All of these Leveraged Buy Outs create companies that look healthy to outsiders but are saddled with debt and paying vastly inflated interest on that debt (well above the interest that they'd have got at market rates). I think that Manchester United Football Club are probably the most famous example of this at the moment, but it's becoming more common

Otherwise the UK will increasingly be a country where there's more incentive to "earn" your money through owning shares/property or setting up a string of firms to shuffle money between, and therefore less incentive for people to work in ordinary jobs (who don't have those options).

Do we want a country that rewards actual workers or those whose "earnings" are just from what they "own"?

 

[deltic]

I agree that all income should be taxed the same regardless of how it arises and ideally taxed at source if possible.

Council tax is a tricky one as due to exorbitant increases in house prices there are many people who are wealthy in asset terms and poor in cash terms.

There are certain sectors of the economy where paying tax seems to be treated as optional. Over the years we have had a number of builders who are quite surprised that you don't want to pay them in cash even for very large jobs - and a roofing contractor who claimed to be working on a large number of jobs but who happily said they weren't VAT registered.

To be fair to the builders its their customers who effectively didn't want to pay tax on the work they wanted carried out.

 

[brad465]

Ever since 2008 the loosest monetary policy in history has stifled productivity, as rather than trying to increase growth in productive industry, printing loads of 'fake money' has inflated asset values, further driven by low interest rates making property a more attractive investment. More wealth going into assets than productive industry means less tax revenue potential under the current system.

Therefore I think one or a combination of the following needs doing to improve tax revenue without hitting the least well off and/or increasing income tax rates: introduce a wealth tax above a certain threshold (that the overwhelming majority of the population will be underneath), that would increase tax revenue overall, and/or incentivise more wealth going to better use elsewhere. The other option is to end the loose monetary policy of the last 12 years that has caused the current problem to arise in the first place; if the system collapses as a result of raising interest rates back to historical norms, that says more about the broken system. Besides, low rates to try and avoid a crisis hasn't exactly stopped Covid and Russia invading Ukraine, they've just made trying to combat the economic effects of those 2 crises even harder.

 

[NSEFAN]

Get the whole planet on a standardised tax system and flat rates. That'll take care of the most wealthy being able to avoid tax.

Just needs all the world's nations to agree on this. I don't think that will be happening any time soon.

 

[simonw]

"The Rich" (whatever that means) already DO pay alot of taxes.

Suppose that once a week, ten men go out for beer and the bill for all ten comes to £100. If they paid their bill the way we pay our taxes, it would go something like this...

The first four men (the poorest) would pay nothing.
The fifth would pay £1.
The sixth would pay £3.
The seventh would pay £7.
The eighth would pay £12.
The ninth would pay £18.
And the tenth man (the richest) would pay £59.　
So, that's what they decided to do.

The ten men drank in the bar every week and seemed quite happy with the arrangement until, one day, the owner caused them a little problem. "Since you are all such good customers," he said, "I'm going to reduce the cost of your weekly beer by £20." Drinks for the ten men would now cost just £80.

The group still wanted to pay their bill the way we pay our taxes. So the first four men were unaffected. They would still drink for free but what about the other six men? The paying customers? How could they divide the £20 windfall so that everyone would get his fair share? They realized that £20 divided by six is £3.33 but if they subtracted that from everybody's share then not only would the first four men still be drinking for free but the fifth and sixth man would each end up being paid to drink his beer.　

So, the bar owner suggested that it would be fairer to reduce each man's bill by a higher percentage. They decided to follow the principle of the tax system they had been using and he proceeded to work out the amounts he suggested that each should now pay.

And so, the fifth man, like the first four, now paid nothing (a100% saving).
The sixth man now paid £2 instead of £3 (a 33% saving).
The seventh man now paid £5 instead of £7 (a 28% saving).
The eighth man now paid £9 instead of £12 (a 25% saving).
The ninth man now paid £14 instead of £18 (a 22% saving).
And the tenth man now paid £49 instead of £59 (a 16% saving).　
Each of the last six was better off than before with the first four continuing to drink for free.　

But, once outside the bar, the men began to compare their savings. "I only got £1 out of the £20 saving," declared the sixth man. He pointed to the tenth man, "but he got £10!"　
"Yeah, that's right," exclaimed the fifth man. "I only saved a £1 too. It's unfair that he got ten times more benefit than me!"　

"That's true!" shouted the seventh man. "Why should he get £10 back, when I only got £2? The wealthy get all the breaks!"　

"Wait a minute," yelled the first four men in unison, "we didn't get anything at all. This new tax system exploits the poor!" The nine men surrounded the tenth and beat him up.　

The next week the tenth man didn't show up for drinks, so the nine sat down and had their beers without him. But when it came time to pay the bill, they discovered something important - they didn't have enough money between all of them to pay for even half of the bill!　

And that, boys and girls, journalists and government ministers, is how our tax system works. The people who already pay the highest taxes will naturally get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy and they just might not show up anymore. In fact, they might start drinking overseas, where the atmosphere is somewhat friendlier.　

that story isn't a good analogy to how the tax system works.

 

[deltic]

Ever since 2008 the loosest monetary policy in history has stifled productivity, as rather than trying to increase growth in productive industry, printing loads of 'fake money' has inflated asset values, further driven by low interest rates making property a more attractive investment. More wealth going into assets than productive industry means less tax revenue potential under the current system.

Therefore I think one or a combination of the following needs doing to improve tax revenue without hitting the least well off and/or increasing income tax rates: introduce a wealth tax above a certain threshold (that the overwhelming majority of the population will be underneath), that would increase tax revenue overall, and/or incentivise more wealth going to better use elsewhere. The other option is to end the loose monetary policy of the last 12 years that has caused the current problem to arise in the first place; if the system collapses as a result of raising interest rates back to historical norms, that says more about the broken system. Besides, low rates to try and avoid a crisis hasn't exactly stopped Covid and Russia invading Ukraine, they've just made trying to combat the economic effects of those 2 crises even harder.

The problem with wealth taxes are that they are relatively easy to avoid given the ease of using offshore companies in tax havens

 

[Starmill]

The current system is a mess, but reforming it is a herculean task. The problem is, the government doesn't actually want to reform it.

To take the big example given above, abolishing National Insurance Contributions. There is now an overwhelming case for doing this, because the link between contributions and entitlements is so weak that it might as well not exist any more, and the technical separation of the National Insurance Fund is also a paper exercise since George Osborne's changes, the funding is no longer hypothecated. What should happen is all forms of NIC should be withdrawn completely, and replaced with three new mechanisms. One the new income tax, set at exactly the same effective rates as the current combined income tax and national insurance, but applying to all income earned by employees, workers, and sole traders. The second would be a payroll tax on employers, but probably something which could be set regionally, for example to permit a couple of points of reduction in payroll taxes in areas of England with the highest unemployment. Third would be a new state pension entitlement credit, backwards compatible with the entitlements people have already 'bought' with their NI payments and credits.

This is an enormous job, but it's all easily achievable within a few years. We could then easily change the rate of income tax to have more bands but stop it from zig zagging around like it currently does. It would broaden the base of the taxes on income, making them more difficult to avoid, and it would increase rates for people who've passed state pension age or are self-employed, which is fairer and simpler as well as raising more.

Unfortunately, the government absolutely does not want to do this. The key reasons are that they're too spineless to increase taxes on pensioners despite their exemption from a large proportion of current taxes on income making no sense, and that the new income tax rates of more than 50% would make bad headlines and 'feel' like a lot, despite not being any different to today. The government are quite happy that people often remember the rates of income tax but quickly forget that NI is also due.

 

[Cdd89]

I’m strongly in favour of progressive taxation, and I can absolutely see the appeal of a wealth tax. But if your goal is increasing the tax take in the long term, it’s not a great idea. Lots of countries have tried it, and the vast majority have abandoned them; the ones that remain are full of exceptions. As Dennis Healey wrote:

We had committed ourselves to a Wealth Tax; but in five years I found it impossible to draft one which would yield enough revenue to be worth the administrative cost and political hassle

As for what I’d do instead, to target the ‘rich’ (in a way that is fair, and hard to avoid):

• Set capital gains tax to equal income tax rates. The rates currently need to be low in order to account for inflation, so the rates should be far higher (but inflation adjusted). This would hugely increase the tax take on rapid gains.
• Eliminate re-basing of asset values upon death (“CGT Uplift”). Currently, assets are rebased to the new value after payment of inheritance tax, but that’s just paying off the capital gains tax the original holder had been putting off realising.
• Add further “super rich” income tax bands. These would have a few effects, but one is that it would incentivise people to realise CGT earlier, since if they defer until death their income would pass the super rich threshold. There might need to be exceptions for indivisible assets such as properties.
• If we wanted to be more radical, consider “mark to market”, where people are forced to pay capital gains tax as they go (rather that being able to defer and thus delay payment and compound unrealised gains). This has some similarities to a wealth tax, but also some of the same problems; it can only realistically be applied to certain asset classes.

While I am in favour of progressive taxation, and the above are the right thing to do, none of them are going to raise serious amounts of money, and the only way to do so is (unfortunately) to increase taxes that affect most people. Depressing but true.

I agree about NI contributions; but I would be absolutely amazed if I ever saw it happen. People would resent the fact that their payments into the system had been “thrown away” in favour of some new system; remember that the self employed often make voluntary contributions. It’s as toxic as trying to reform pensions.

 

[brad465]

The problem with wealth taxes are that they are relatively easy to avoid given the ease of using offshore companies in tax havens

In an ideal world our many tax havens would be shut down as well, but I don't see the oligarchy running a number of media outlets in this country letting that get anywhere.

 

[david1212]

For personal taxation two factors that need to be considered.

There are already many smaller businesses that are marginal. While the directors and senior managers will be getting gains e.g. pension contributions as in post 6 any tax increase against them could be the turning point to ceasing to trade. How can you split them from those in large companies earning the same but having far less risks?

I am not up to date on self-employment as 15 years since I returned to being employed. Certainly then the lower tax / NI paid was offset by not being entitled to some benefits e.g. non means-tested unemployment rather social security, sickness.
Back over the last two years while some support rather different to employer / employee furlough.

Likewise for corporates while numerous loopholes to reduce the tax they pay given the number who are international rather than UK only the risk is if the loopholes are closed to increase the tax they pay the reality will be that the UK part will be shrunk or closed so reducing employment / increasing unemployment.

Overall all changes have to actually give a medium and long term nett gain to the treasury.

 

[Falcon1200]

If we are going to base local council taxes on property prices then these need to be revalued - at the moment we are paying based on what houses were worth in about 1991 - and the rampant price increases since then mean a lot of mega-expensive houses aren't paying the share that they would pay if assessed today

And some houses have been extended to become larger than others in the same street, yet remain in a lower Council Tax band. Apart from which Council Tax is inherently unfair anyway because it takes no account of householder income, so a home with 4 working adults pays less than one occupied by a pensioner couple if it is in a lower band. Examples of both situations can be found in my street. A local income tax should replace Council Tax.

 

[MattRat]

Just responding in general about a 'wealth tax' and the idea of 'taxing the rich'. The problem isn't that the rich (or super rich if you prefer) don't pay enough, the problem is they don't pay tax at all. No point in more taxes if they still don't pay them.

 

[Enthusiast]

If we are going to base local council taxes on property prices then these need to be revalued - at the moment we are paying based on what houses were worth in about 1991 - and the rampant price increases since then mean a lot of mega-expensive houses aren't paying the share that they would pay if assessed today

There is absolutely no justification to base local taxes on the value of the property the taxpayer occupies. There is very often no link between that value and the resident's ability to pay. The idea of the valuation exercise was to identify relative property values, not absolute values. It is also no fault of the occupier if he lives in an area which enjoys high property price increases. The logical end to increasing the tax as the property value rises is that unless the occupier's income rises similarly he will have to sell his house to pay his tax. Not something, I think, that should be encouraged though if you give some LAs that idea they may jump on it.