Taxation

Taxation

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The UK should have a progressive and effective tax system, in which the tax gap (including but not limited to tax avoidance) is tackled as an absolute priority, and the costs of contributing to tax revenues should be shared in relation to ability to pay, so that wealth is taxed more effectively and the richest in society pay a higher proportion of their income as tax as the poorest (including all taxes, not just income tax).

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For more on taxation, see our sister organisation, TaxWatch.

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Fairness and tax

Taxes are the price we pay for living in a fair and civilised society with a dynamic economy. They raise revenues, redistribute wealth, correct market distortions, and strengthen democracy.

Businesses have a moral obligation to repay society for the social infrastructure (hospitals, schools, roads, police) that they depend on in order to generate profits, and should not be simply maximising returns for their shareholders and ignoring this.

When a tax system favours an elite over the majority it is fatally undermined. The costs of contributing to tax revenues should be shared in relation to ability to pay and as laid down by Parliament.

Tax law is complicated, but the basic principle is simple. Everyone who lives, works or owns a business in this country gets something out of our society. It therefore follows that everyone who lives, works or owns a business here needs to pay their share back into the nation’s coffers at a rate that is proportional to their income. This is an idea that most people understand perfectly well, but that some big companies and individuals don’t seem to get. It’s a view that has to change.

Julian Richer, The Ethical Capitalist

A progressive tax system

A progressive tax system means that the costs of contributing to tax revenues are shared in a way that takes into account the ability to pay. Companies and the wealthiest should pay their fair share to ensure trust in the system, tax should increase in proportion to a person’s wealth and income, a sustainable tax system needs to look beyond increasing taxes on just those at the top and companies, and the poorest should be protected from tax rises.

An effective tax system

An effective tax system means that everyone (individuals and organisations alike) pays the amount they are asked to pay, with minimal opportunities for avoidance or evasion and a strong enforcement regime to deter, detect and deal with both (with a better-resourced HMRC), so that the 'tax gap' between the amount of tax that is owed to HMRC and the amount of tax that is actually collected is minimised. The law should be applied in its totality, and enforcement should be applied comprehensively, consistently and proportionately to the scale of the misdemeanour.

Taxes are what we pay for a civilised society.

Oliver Wendell Holmes, Jr., U.S. Supreme Court Justice

What needs to change

Tax avoidance is morally wrong, in that it fails to contribute to the cost of the social infrastructure that enabled profits to be made in the first place, but it is also dishonest, which equates to fraud. In most cases it is unlawful, because it is breaking the rules to gain an advantage that parliament never intended. Although limited progress has been made on tax avoidance in recent years, the tax gap (the difference between the amount owed to HMRC and the amount that it collects) is still unacceptably high.

The tax code needs to be simplified, to make life easier for everyone and to reduce opportunities to game the system. As part of this, all tax reliefs should be assessed, and those that are not delivering their intended outcomes should be reformed or removed.

Putting more money into HMRC will generate many times as much in tax revenue; this needs to happen now and needs to be accompanied by a more aggressive approach both to tackling tax avoidance and to prosecuting tax fraud, with more transparency around deals with large companies and more accountability of HMRC to parliament.

We need to build on recent progress in beneficial ownership transparency for companies by boosting the regulatory and enforcement capacity of Companies House, and by requiring similar transparency for trusts.

The government should require public country-by-country reporting of the revenues, profits and taxes of multinational companies, and should also consider how to encourage similar transparency around the incomes of, and taxes paid by, wealthy individuals in the UK.

The UK needs to play a more proactive global leadership role in reducing the opportunities for multinational companies to avoid tax by shifting profits between jurisdictions, helping to build a fairer (unitary) global taxing regime as well as taking unilateral action domestically where needed to ensure a level playing field between domestic and global firms.

The government should not pay consulting fees for tax policy advice to professional services firms who then advise their private sector clients on how best to avoid or circumvent those policies.

The government should make more use of its existing powers to tackle corruption and tax evasion, such as the much greater use of unexplained wealth orders.

Income should be taxed at the same rate, regardless of its source and of how the person earning it is registered. Tax rates for employment and self-employment, and on income from work, capital gains and dividends, should be equalised.

Corporation tax is important for ensuring that businesses contribute to the costs of the social infrastructure (hospitals, schools, roads, police) that they depend on in order to generate profits, rather than just maximising returns for their shareholders. The UK corporation tax rate should be at or above the OECD average, and should not be offset by excessive and unnecessary allowances.

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Taxation and fairness

We do not believe that every individual and business should be treated equally in relation to tax (which would equate to a flat tax structure). Where we do believe in equal treatment (or procedural fairness) is that every individual and business should pay the full amount of tax that they owe, with no special cases or loopholes, a more coherent and stronger approach to preventing tax avoidance, and a consistent and proportionate approach to enforcement. But how much tax individuals and businesses are asked to pay should be progressive, with those earning more money asked to pay a higher percentage of their income in tax than those earning less.

When it comes to how progressive the tax system should be, we differentiate between horizontal equity and vertical equity. Horizontal equity means that people in the same circumstances should be treated the same. So, for example, people should pay the same rates of tax on their incomes, whether they are employed, self-employed, or engaged through a personal services company. Income from capital gains or dividends should also be taxed at the same rate as income from work (which will not cause the ‘exodus of the wealthy’ that defenders of the status quo like to invoke). Reforms should be introduced to iron out inconsistencies in how people in similar circumstances are taxed in terms of national insurance contributions, council tax and inheritance tax. And enforcement should be applied consistently (for example, enforcement of tax avoidance by large companies compared to individuals, or the treatment of tax cheats compared to benefits cheats, as outlined below). Meanwhile, vertical equity (a progressive taxation system, in which those who own more pay a higher rate of tax) is about the extent to which income should be redistributed between different groups, and is more of a political value judgement.

We know that people get very angry when wealthy individuals or organisations are able to use their wealth, influence or power to avoid playing by the rules, and to get away with it. This has led to widespread public anger about tax avoidance. So an unfair tax system undermines public faith in the social contract, as well as their willingness to pay tax themselves.

Taxes are a necessary building block for a fairer society, providing governments with the revenue to support high-quality, universal public services and redistributing income to those in greatest need. This helps to reduce economic inequality and create a slightly more level playing field, which is necessary before any degree of equality of opportunity can be possible. Taxes deliver the four Rs:

  • Revenue (funding to deliver the services citizens need): taxes raise the revenue with which governments can drive human development by providing health, education and social security systems, as well as the basis for a successful economy through regulation, administration and investments in infrastructure.
  • Redistribution (addressing poverty and inequality): a progressive tax system redistributes wealth within an economy from the wealthy towards the poorest and most vulnerable, to reduce poverty and inequality and ensure that the benefits of development are felt by all. IFS analysis from 2019 found that though benefits do much of the work in reducing income inequality, taxes also redistribute from rich to poor, and are responsible for at least a fifth of the total redistribution the tax and benefit system achieves. However, some aspects of our tax system (such as many tax reliefs, and tax avoidance, and certain taxes such as council tax) are regressive, and redistribute wealth upwards, from the poorest to the wealthiest in society.
  • Representation (building governments accountable to citizens): taxation is a fundamental part of state-building and democracy. Collective bargaining around tax revenue creates a ‘social contract’ between people who pay taxes and vote for political parties, and officials who are expected to raise and spend those revenues in a way that benefits the constituents who elected them.
  • Repricing (limiting public ‘bads’ and encouraging public ‘goods’): Taxes can be used to ensure that all of the social costs and benefits of the production or consumption of a particular good are reflected in the market price, making it costly to engage in activities that are considered socially undesirable, or incentivising behaviour that is considered beneficial to society.
Learning from other countries

Denmark collects significantly more tax (as a proportion of GDP) than the UK, which allows it to fund better public services. OECD analysis shows that in 2019 it came top among all 37 OECD countries in terms of if its tax-to-GDP ratio, at 46.3% compared with the OECD average of 33.8% (and 33.0% in the UK). Denmark’s tax structure also differs from the average OECD country in that it receives substantially higher revenues from taxes on personal income, profits and capital gains (54% compared to an average of 24%), although this is partially offset by the lack of social security contributions.

Higher levels of income and other taxes in Denmark are supported by the Danish population because they pay for extremely good public services (and may also help to explain why Denmark consistently comes out near the top of the UN’s annual World Happiness Report). Denmark has an excellent education system with free tuition including at university, generous paid parental leave and subsidised childcare, free healthcare, and a comfortable state pension. Support for high taxes are mirrored by a culture that stigmatises tax avoidance (as well as a strong regulatory and enforcement regime). In 2020, for example, Denmark became one of the first countries to ban companies that are registered in tax havens from accessing financial aid during the coronavirus pandemic.

The situation today

The tax system is not particularly progressive, with the costs of contributing not shared in a way that takes into account ability to pay:

  • Companies pay one of the lowest corporation tax rates among OECD countries (and the lowest in the G7), at 19% compared to an OECD average of 24% (although this is increasing to 25% in 2023, which will raise over £22bn per year)
  • The richest 10% pay just 34% of their income in taxes, but the poorest 10% pay 42% of their income in taxes (including VAT etc), and although income taxes and NICs are progressive, the highest-income fifth pays just 2.7 times as much direct tax as a share of income as the poorest fifth; while indirect taxes (VAT and excise duties) measured as a share of expenditure are distributionally neutral, council tax is regressive (the poorest 10% of the population pay 8% of their income in council tax, while the richest 40% pay 2-3%); and analysed at household rather than individual level, the income tax system is more or less flat, while indirect taxes are regressive
  • Wealth is not effectively taxed (including capital gains, pensions and property), with insufficient rates and excessive allowances (including unnecessary tax reliefs for companies as well as for individuals)

Neither is the tax system very effective:

  • The tax gap (the difference between the amount of tax that should be collected, and the amount of tax actually collected) was estimated by HMRC at £31bn in 2020, but is estimated by campaigners to be much higher (including an extra £25bn lost due to profit-shifting by multinational companies)
  • HMRC's staffing has halved over the last decade, despite the fact that every £30,000 that is invested in an extra compliance officer brings in £900,000 in additional tax revenues
  • The UK prosecutes 23 times more people for benefits offences than tax offences, but the value of tax fraud is 9 times higher

The UK aspires to Scandinavian levels of public services, but we do not raise enough taxes to support them. OECD analysis shows that the UK ranked 23 out of 37 OECD countries in terms of its tax-to-GDP ratio in 2019, with a ratio of 33.0% compared to an OECD average of 33.8%. By comparison, Denmark has a ratio of 46.3%, and most other European countries have ratios between 35% and 45%. The problem is not that we spend too much money, but that we raise too little money.

Our inadequate tax system is both a cause and a symptom of the scale of inequality in the UK today:

How we got here

The tax system has become less fair in some respects over the last few decades. Recent governments have progressively reduced corporation tax, which was at 26% in 2011 and had reduced to 19% by 2017, with the pre-covid intention of further reducing it to 17% before this policy was reversed in early 2021. Meanwhile, changes to income tax rates and bands have caused fluctuations in the progressiveness of income tax over the years. VAT has become more regressive in recent years as the rate has risen to 20%, while a failure to revise property rating bands for council tax has made this even more regressive than it was before. An increasing number of exemptions, allowances and reliefs have also reduced progressivity by enabling larger taxpayers to reduce their contributions, as well as increasing the opportunities for avoidance. These trends are largely driven by deliberate political choices.

The tax system continues to be much less effective than it could or should be. There have been legislative changes over the last few years that, combined with increasing public anger at corporate tax avoidance, have curbed some of the more egregious examples of profit-shifting by multinational companies. However, the system is still deeply unfair in the way that 'white collar crime' (e.g. tax fraud) is prosecuted far less harshly than 'blue collar crime' (e.g. benefits fraud). This is partly because tax avoidance is widely seen as being legal (when in fact it is not, even if it is not always a criminal offence), and partly because of weak HMRC enforcement. The latter is not helped by the fact that HMRC's funding and staffing levels have decreased sharply in recent years, but is also linked to a deliberate decision by HMRC not to investigate and prosecute tax fraud more aggressively - in part because the criminal justice system would buckle under the pressure if tax fraud was dealt with in the same way as benefits fraud. This has got worse recently (the number of prosecutions for tax-related crimes has halved over the last five years). As our friends at Taxwatch have argued, “although tax avoidance operates in the margins and gaps of the law, and as a result may not be explicitly prohibited by law, most tax avoidance is unlawful in the true meaning of the word.”

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