Friday, March 10, 2017

The tax system needs to change to keep up with the economy

With 20:20 hindsight it was unfortunate that the 2015 Conservative manifesto pledge about tax and NIC was not worded as a promise not to increase the basic rate of tax and the main rate of national insurance.

It should not be beyond the wit of man to find a form of words for an election promise not to raise the general level of tax as it affects most people without opening yourself to being accused of breaking that promise whenever the government closes a tax loophole or corrects an anomaly.

It is not proposed to increase the tax or national insurance rates which affect the vast majority of people, but I can see why those who are adversely affected by the proposed measure to equalise the National Insurance Contributions of employed and self-employed people are upset by the proposal.

I welcome the Prime Minister's comments that there will be no move to legislate on the proposal until the autumn permitting further examination of how tax and benefits as a whole affect employed and self-employed people so that parliament can satisfy itself that the overall treatment of both classes of people are fair and equitable.

But whatever happens about National Insurance Contributions, it is a fact of critical importance that the way the economy works is changing fast, as is the pattern of employment and self-employment that people follow through their working lives.

Nation states whose tax systems do not evolve to take account of the changing pattern of earning and spending will soon find their revenue base as obsolete as the dodo - and just as dead.

There may be many very good reasons why people might want to organise their lives to be self-employed rather than work for someone else. If they are given a large tax incentive to do so, no reasonable person should blame them for following that incentive. If you want to blame somebody, blame the government which gave them the incentive in the first place.

But by the same token, any responsible Chancellor of the Exchequer must should keep a careful eye on what opportunities the tax system he or she runs provides for people to minimise their tax bill, what will happen to the public finances if lots of people follow those opportunities - and if the answer is unacceptable, he or she has to do something about it.

There is a very interesting article on the CAPX website by  which you can read here called

"Hammond prepares for the coming taxpocalypse."

I would not necessarily go along with every word in the article but his basic point that

"A 20th century tax system is in the middle of a juddering collision with the 21st century economy"

is dead right, and the row over NICs for self-employed people is not the first, and will not be the last example of the challenges which will face governments of right and left alike all over the world because of it.

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