Ok so we saw below (blog) why we may need to pay taxes the
question now becomes how we pay them. Basically there is no free lunch – someway in some form you are going to pay a tax. Income tax is the obvious one, the value added tax is fairly clear, national insurance and car road fund are types of taxes too so there are a few for a start – even if you don’t work they’ll get you. We could always load it on corporation tax instead – after all they have lots of money. But then if we do that it will impact on prices. Companies are not able to run at a loss and so company tax becomes just another business expense.
Of course we can conclude that the Government is on the make– after all why have I paid my car tax for such rubbish roads, why do the government expect me to fund my health care when I pay NI? Here’s the problem, we don’t pay enough….
NI take - £110 billion – £289 billion cost of pensions and NHS
Car tax, tax on fuel -£5.9billion and £26 billion - £23billionspend on transport
So the we haven’t paid anything like enough for health and pensions but we have paid a bit too much for roads, especially as
transport includes non-road transport. Or have we? Of course non-road transport (trains) eases pressure on the roads, in addition ‘transport’ does not include policing nor does it include spend at a local level by councils. So maybe we could ease
tax on fuel back by £9 billion but then which other tax will we put up to cover this and what impact will that have on car use – people won’t drive less as a result!
Thinking about tax and fairness it always seems a little strange to tax someone on effort. Income tax is problematic as it taxes work. Income tax also makes up our biggest tax revenue at £167 billion. That said many people don’t pay it – after all the tax threshold is£10,000 and after that you pay 20% until you get into the 30s. But actually it’s not quite that simple. If you have
a couple of children and earn£20,000 the Government give you back about £4,000 – which is more than 20% on the £10,000 you have earned. So income tax is, contrary to popular belief, mostly paid by the wealthy.
It still seem a little perverse to tax people on effort but at least the present approach taxes proportionally higher based on ability to pay. The third biggest tax is National Insurance. As we have seen above this doesn’t cover what it was set out to pay for but provides a useful income. Again it charges proportionally more for those earning more.
Sat between these two is VAT. VAT seems fair, tax on spend not on effort. Of course there are anomalies such as the VAT on health and hygiene products but overall it seems a fair tax. Perhaps an answer is to lower income tax and increase VAT?
An increase in VAT to 25% would in theory raise over £20 billion and that could crudely see a 20% drop in income tax (from 20% to 18% not unfortunately from 20% to 0%). The only trouble with this is those on a zero income would see cost rise but income remain static. Pension and benefits would have to increase to cover this shortfall.
Once cars are stripped out of excise duties the remainder is quite modest and let’s face it the drunks and smokers clogging up the NHS and the courts outweighsthe amount collected in revenue. Corporation tax and business rates together add up to £68billion. In many ways it is hard to see how this could be increased. Any increase is likely to be passed on in the form of
higher prices and so we may as well collect that money directly via VAT.
Inheritance tax is a funny one. It’s very low and only applies above £325,000. The thing is most of this relates to increases in the value of houses. It is not earned but a happenstance of owning property, property that you wouldhave paid less than £50,000 in the early 80s now worth over the inheritance tax threshold. Of course even with interest you would have paid nothing like this amount. So why don’t we lose the threshold and simply charge a flat 20% on all estates. We only raise about £3billionthough inheritance at the moment but this could rise significantly with a new threshold and rates. In addition it has the advantage of stimulating the housing market by encouraging sales to fund the tax bill whilst not reducing anyone’s incentive to work.
What we see of course, just as with spending, is that taxation is necessary but over complicated. We take income tax from the low paid and give back more in the form of credits. We strip the NHS of cash and then expect enhanced services – when we haven’t even paid for the ones we get. We complain about poor infrastructure but want to pay less tax in order to improve it.
Overall we simply want someone else to pay….