Another project in the ilk of the Office of Budget Responsibility, courtesy of rebranding consultant/ former Chancellor of the Exchequer was the Office of Tax Simplification (OTS).
Alongside such arousing topics as the constitution, tax reform garners little coverage from the press and grumbles from the public regarding bizarrely numbered forms. Tragically, and beneficially for those in government, it is these issues that fundamentally alter the rules of the game.
It would now seem that the ‘too complex’ nature of our tax system has passed into the realm of commn sense. Indisputably positive intentions like ‘choice’, ‘modernisation’ and ‘simplification’ often obfuscate deeper, politicised agendas.
And so, speculatively, it goes with the Office of Tax Simplification, moving us closer to a flat tax system much loved by The Conservative Party and Mr. Osborne himself.
What is the Office of Tax Simplification?
Established by George Osborne in July 2010, the Office of Tax Simplification as an Office of HM Treasury, was created to ‘identify areas where complexities for both businesses and individual taxpayers can be reduced and to publish their findings for the Chancellor to consider ahead of his budget’.
Why Tax Simplification?
Undoubtedly there is need for reform of tax collection in the United Kindom. Globalisation and changing working patterns consistently present new challenges to the tax authorities.
From offshore funds to closing loopholes there are countless ways in which reforming and simplifying the tax system would be beneficial. However, the discourse of simplification has predominantly been deployed by those arguing in favour of a flat tax system.
Advocates of the Flat Tax
George Osborne and top Tories are longstanding supporters of the flat tax system advocated by bodies such as the Centre for Policy Studies (CPS), see their statement on tax and Brexit here, and The Taxpayers’ Alliance. Always dressed in terms of ‘simplification’, ‘fairness’ and improved economic performance.
The supposed simplification a flat tax offers is an easier sell to the electorate than the other objectives of the flat tax: namely a massive tax cut for the wealthy, a shrinking of the tax base and consequent lack of funding for public services. But who doesn’t want modernisation and simplification?
What Is a Flat Tax?
There are numerous forms of flat tax systems. The most comprehensive manifesto for such a tax in the United Kingdom can be found in the report of the Tax 2020 Commission, established by The Taxpayers’ Alliance.
The report advocates a marginal flat tax (one with a personal allowance), excluding transaction, wealth and inheritance taxes, and a raising of the personal allowance. Regressive taxes such as VAT would be preserved.
The six key proposals of the report are:
- Taxes should be cut to 33 per cent of national income
- Marginal tax rates should not exceed 30 per cent, and the personal allowance should rise to £10,000.
- Taxes on capital and labour income disguised as business taxes should be abolished, and replaced with a tax on distributed income.
- Transaction, wealth and inheritance taxes should be abolished.
- Other consumption taxes need to stay for now, but transport taxes should be cut.
- Local authorities should raise half of their spending power from local taxes.
Most notably with reference to the Office of Tax Simplification, the report proposes that an income tax rate of 30 per cent could be achieved by scrapping Employees’ and Employers’ National Insurance contributions and merging them into a single tax on labour income at a rate of 30 per cent.
Secondly, in the name of ‘fairness’ it proposes lifting the personal allowance to £10,000.
So What Has the Office of Tax Simplification Done So Far?
In its first six years, the OTS’s recommendations have been fairly innocuous: the abolition of a host of out-of-date tax reliefs and some sensible taxation reform for small companies. Taxpayers may be wondering what their money is being spent on at the OTS.
And the future aims of the OTS?
Through the Finance Bill 2016, then chancellor George Osborne decided to enlarge the scope of The Office of Tax Simplification and put it on a statutory footing.
The OTS’s first strategy document since becoming a statutory body has brought its attention to the rise of the ‘gig economy’ [in the context in which] ‘all current and future OTS reviews will be set’.
Angela Knight laments the fact that: ‘we [the OTS] have not delivered a noticeably simpler system for the average taxpayer’, further hinting at the new emphasis on personal rather than corporate taxation.
Setting the Office’s task of tax simplification in the context of ‘Uberisation’ has neatly shifted the focus and ‘need’ for tax simplification from tax on capital income to tax on labour income. At the same time a complex and outdated corporate tax structure remains unreformed.
As such, the OTS’s focus has shifted decisively towards the reform of employment taxes. Identifying the trend of the ‘gig economy’, the OTS has been recommending changes to the UK tax system resembling the proposals of, amongst others, Tax 2020, and bringing the idea of a flat tax closer to the political mainstream.
The Merger of National Insurance and Income Tax?
Accordingly, the recent OTS report: ‘Closer Alignment of Income Tax and National Insurance Contributions’, proposes a seven point plan for bringing (Income Tax) IT and (National Insurance Contributions) NICs closer together to the point that a complete merger of the two would be logical. Given that the lower rate of IT is 20 per cent and that of NICs is around 11 per cent, the resultant levy would be close to the 30 per cent flat tax rate proposed by Tax 2020.
Recent Changes to the Personal Allowance
The recommendations of the OTS follow Treasury reforms to the Personal Allowance that have brought the UK tax system closer to that proposed by Tax 2020. From its level of £6,475 in the 2010/11 tax year, Osborne has taken the Personal Allowance to £11,000 for 2016/17.
Each rise has been couched in terms of taking people out of tax altogether. In actuality, raising the Personal Allowance favours higher earners by taking more of their income out of the higher rate tax band. Besides, this aspect of taxation is now firmly aligned with the needs of a flat tax system and its offer of ‘fairness’ to those on lower incomes.
Towards a flat tax? And a smaller state…
There is a real danger here. The debate over tax reform isn’t just about simplification. Those advocating a flat tax aim for a massive cut tax for the wealthy, reducing the tax base and thus shrinking state provision.
As is the modern methodology of politics, this generation of Tories won’t risk the shock policies of the Thatcher era. No poll tax moments here. Instead, the context is nurtured until a flat tax (via the discourses of simplification and modernisation) becomes a ‘common sense’ solution. Previously fringe policy proposals from right-wing think tanks and the press may soon appear to be the solution to a stagnant economy and the changing nature of employment. (Case 2: Jeremy Hunt and the deliberate denigration of the NHS)
Sadly, those on the Left are happy to luxuriate in the short-term victories of Twitter feeds and the superficial chaos and u-turns of Conservative Government. Meanwhile, the Right denigrate our institutions, shift the debate and pursue their long-term goals. Without offering an alternative vision of tax reform (or long-term vision of anything!), the left will again be cast as the defenders of a broken status-quo that nobody believes in and the introduction of a flat tax will be the only option.