By William Mills
Labour’s taxation policies are a recipe for disaster being dictated by the politics of envy and any tax rate above 50% can actually reduce the overall amount collected.
In 1974 Labour chancellor Dennis Healey proudly claimed he was going to ‘squeeze the rich until the pip squeaked’ yet within five years Margaret Thatcher won her landslide 1979 victory sweeping the Tories into power for a generation.
Under Labour tax rates were raised to a staggering 83% of top rate income tax and an unheard of 98% for savings income, or investment income surcharge as it was known then.
Two things then occurred, high earners simply demanded a higher gross to make up the shortfall in their net pay, and once tax takes more than half someone’s pay packet it is more beneficial for him to concentrate on finding tax loopholes to protect his take home wage than getting on with his work.
The present day Left are promising a crack down on tax loopholes and avoidance without really knowing what they are letting themselves in for. The evasion of paying tax has always been a criminal offence. Rearranging ones financial affairs to avoid the highest rates of tax is entirely a different matter.
Simplest is moving oneself and one’s company abroad to the detriment of this country’s economy.
However we need to look at tax avoidance from a wider perspective. Take home wages buy us a certain standard of living which cannot always be measured in terms of money. Consider an overseas student who comes to Britain.
At home his monthly income of (say) £500 buys him a good lifestyle; a nice house, a flash car, domestic servants and money left over for going out to restaurants and theatres.
Yet in southern Britain the same amount will provide a humble bedsit and a handful of groceries bought at discount rates. The once affluent young man is now facing a life of grinding poverty.
Yet in Soviet era times a similar modest cash amount could buy untold luxury for the elite communist dignitaries lucky enough to have access to Moscow’s fabled party members’ shops. Here, shoppers were confronted with the top of the range TVs on sale at a fraction of the price. Imagine going to the Pound shop and finding a row of the latest sports’ cars all on special offer at a £1 each?
So once income tax, combined with national insurance crosses 50% a taxpayer will spend increasing amounts of his time looking at ways of protecting his standard of living.
An individual usually uses his take home wage to buy a house and furnishings to go within. What happens when his employers buy these items for him instead of giving him cash?
Perks don’t just affect higher paid directors. Returning to our overseas student who now gets a job in a restaurant and as he needs to stay off the HMRC radar because of his visa conditions earns just below the NI threshold.
Yet as a perk, he’s allowed to eat as much as he wants in the kitchen of food which would have otherwise been thrown away. That would improve his standard of living no end, which in turn would be further improved if he got his next job in a hotel which let him use a room as work related accommodation, eat free, use the hotel’s luxury facilities including borrowing the pool car. It then transpires his Dad is a director of an overseas’ hotel chain and has offered to reciprocate.
Trying to tax lifestyle is very different than tracking down traditional undercover cash payments made in brown envelopes. Supposing a 50% tax band worker earning in excess of £100,000 is offered loan of the company Lear jet to fly down to the company villa in the Sun for a few days with friends?
How do you assess the benefit when informed the jet had to go there anyway for a service and after reports of a break in an employee needed to go and check the property, and while there the employee and his chums helped by tidying up the garden to improve security?
If an individual gets the exclusive use of a company asset it is possible to charge the perk for tax. But once it is shared perk it is much more difficult to assess.
The higher tax regime of the 1970’s saw a blossoming of senior management perks; a key to the posh loo, use of the upstairs typing pool which always seemed to be staffed by attractive young women, use of the company credit card for posh lunches, and much time was taken up with stories of entertaining overseas export customers.
As tax bands rise so blossoms a tax avoidance industry with a new tale every day. For a small rise in tax receipts increasing numbers of HMRC staff and expensive accountants spend their working day chasing around after different interpretations of valuing lifestyle.
If the tax rates reach the confiscation levels of the 1970’s output and tax receipts actually fall as more and more people engage in tax avoidance to preserve their standard of living.
Whilst today’s young politicians should be applauded for seeking new ways to tackle old problems, equally it is pointless to attempt to revamp old policies which have already been tried, and discarded because they made life worse for rich and poor alike.
The only way to stop tax avoidance is to make the tax rate low enough for taxpayers to regard it as small enough to ‘just pay and forget.’ The UK tax system relies heavily on the co-operation and honesty of its citizens and this trust should not be abused.