In loving memory of the Office of Tax Simplification – but hopefully not its dream
We should radically reshape our taxes, making the legislation a 20 page pamphlet – but we probably won’t, writes Tim Sarson.
Last week tax luminary Bill Dodwell tweeted the sad passing of the governmental organisation of which he had been director, the Office of Tax Simplification. Were the hopes of those who would rip up and rewrite our Byzantine tax system buried that day too?
People have been hankering after tax simplification for as long as I can remember. Our tax statute looks complicated, with its reams of (now electronic) pages in miniature text, its patching of new rules over old and grumbling appendages of convoluted provisions. Large sections of the rules, particularly in business taxation, are a palimpsest: faded older clauses somehow hanging on in there after new ones have been inked on top. Few understand all of its inner workings.
Perhaps we should radically reshape it, making the legislation a 20 page pamphlet, introducing a flat rate tax system and pushing all tax compliance through a simple app with a few basic questions. A nice idea, but it’s hard and unlikely to happen anytime soon.
Some complexity is there for a reason. For one, there is a trade-off between simplicity and fairness. The simpler and more broad-based you make a tax, with fewer exceptions, the more people you’ll over-burden with it. That’s why we have lower rate income tax bands for the lower paid, a VAT registration threshold for small business (the level of which is itself a cause of controversy), and tax reliefs for working parents or charitable organisations.
It’s also what happens when government decides to incentivise certain behaviour, like investment in productive assets or innovation. We get whole new tracts of legislation covering things like R&D credits and capital allowances. Get rid of those and plenty of taxpayers will be unhappy.
Simplification tends to create losers. Take another topic that’s been making headlines recently: aligning the capital gains tax rate with income tax. There are strong simplification and behavioural reasons to do this: it could encourage entrepreneurs to invest in long term growth rather than cashing out on exit. But aligning rates immediately creates a vocal lobby of losers. In fiscal policy, the winners stay quiet while the losers shout loudly. Like other simplifications it also tends to trigger a “termination shock”, which means loads of asset realisations just before the new rate comes in.
There are other reasons where we taxpayers are at least partly to blame. Whole chapters of our legislation are given over to combating mischief. Simple rules can be open to abuse. So along comes the anti-avoidance legislation to patch up the holes, and hey presto a two page provision grows to 30 pages.
Perhaps complexity in our tax system is a symptom of complexity in our diversified economy. Perhaps it’s not so big a deal, as we have technology to manage much of it automatically these days.
Or perhaps not. There remains plenty of clutter in the system that could be removed. Some of the simplifications that would come with much resistance are necessary, in tax as much as in other areas like planning. And there are parts of our system that show the way, like Transfer Pricing. It’s based on the simple rule that transactions between connected parties in a group should be at arm’s length. Principles based legislation doesn’t solve all problems but it certainly cuts the word count.
The Office of Tax Simplification may be dead, but long live its mission. Just don’t expect miracles anytime soon.