Debate Magazine

OK, Here's a Plan Everybody Can Understand

Posted on the 19 September 2013 by Markwadsworth @Mark_Wadsworth
Prompted by Ben W, and bearing in mind political considerations i.e. the fact that people consider income tax to be a worse tax than VAT or NIC and pensioners do pay some income tax but little or nothing in the way of VAT or NIC, how about this for a tax shift:  1. Reintroduce Domestic Rates/Land Value Tax at 100%-ish of site premiums (i.e. rental value minus running costs and amortisation of improvements) = would raise £200 billion (this means approx. 3.5% on current selling prices).  With this extra money, we can do the following: 2. Get rid of the usual list - Council Tax/Council Tax Benefit (£20 billion net) and all the other crappy little ones: Stamp Duty Land Tax, Stamp Duty (on shares etc), Inheritance Tax, Capital Gains Tax, Insurance Premium Tax and the TV license fee (total £50 billion)  3. Increase the personal allowance for income tax to £70,000 per annum (£90 billion), so only the top four or five percent would pay income tax. Higher/additional rate tax is currently officially 40%/45%, but the effective rate is much lower because of e.g. pensions tax breaks and so on. To all intents and purposes, pensions will be tax free (how many people get a pension of more than £70,000 a year?) so we can scrap these reliefs as well and set higher rate tax at 30% or something.  4. Reduce standard rate of VAT from 20% to 15%. The EU won't allow you to have a lower standard rate than this, which is unfortunate (£20 billion after adjusting for corporation tax).  5. Replace Employer's Class 1 and 1A NIC (currently 0%/13.8%) with a flat 5% on all wages with no lower threshold (£20 billion after adjusting for corporation tax). 6. Replace Employee's Class 1 (0%/12%/2%) and self-employed Class 4 NIC (0%/9%/2%) with a flat 5% on all earnings with no lower threshold (£20 billion).  So doing the monthly PAYE calculations will be a doddle, it's just be 10% of the total wage bill, half deducted from headline wages and the rest "paid" by the employer.  7. I've cross referenced it all to HMRC's tables 1.5, 1.6, 3.4 etc available from here. I won't bore you with the workings, but it all stacks up - and that is ignoring all the dynamic benefits that would flow (higher employment, more profitable businesses, much better GDP growth etc, which is the whole point of the exercise).  8. Doing the valuations is easy, it's barely trickier than the revaluations for Council Tax which would - by the Morbidly Obese One's own admission - cost less than £10 per home as a one-off cost.  9. Clearly, the biggest winners would be young families who have recently bought a home (they have the smallest homes relative to their incomes i.e. they have the largest income relative to the value of their homes), on the whole they would be £5,000 - £10,000 a year better off.  10. Most people in the middle will break even. The "hard working" will benefit, the "not so hard working" won't. Tenants will tend to win out slightly and landlords will tend to lose out. Parents with working adult children at home will be laughing, the children can pay the Domestic Rates for them instead of rent and they all live effectively tax free.  11. That just leaves us with Poor Widows In Mansions. a. Pensioners' main residences are about one-fifth of all housing by value, so their potential bill is around £40 billion a year.  b. Total pensioner income in the UK is around £170 billion a year (State pensions and Pensions Credit £90 billion, private/funded pensions £50 billion, final salary pensions £30 billion).  c. Seeing as nearly all of this would now be income tax free, £40 billion in Domestic Rates doesn't seem unaffordable, does it? d. Fact is, pensioners currently pay £13 billion in income tax and about £14 billion in Council Tax and all the crappy little ones listed in para 1. So in theory, their total tax bill under this system would not actually be much higher (£40 billion instead of £27 billion).  e. As a compromise, we could cap their Domestic Rates payments at 12% of their income or something, and allow them to roll up and defer the rest. f. 12% x £170 billion = £20 billion. So pensioners would pay £20 billion annually, slightly less tax than at present, and the other half would be collected on future death/sale (instead of the heirs having to pay Inheritance Tax/Stamp Duty Land Tax).

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