Thoughts on tax reform

In the run up to the general election, one thing which has disappointed me is that none of the three main parties have used the economic crisis as an opportunity to suggest radical reform of the tax system in the UK. Sure, the Lib Dems want to increase the personal allowance and introduce a mansion tax, but that’s really just fiddling around the edges.

My slightly more radical proposal would be to scrap national insurance and increase income tax and corporation tax to compensate, which would bring the following benefits:

  1. The National Insurance Contributions Office could be closed, with the staff being redeployed to deal with other issues, such as manning the understaffed HMRC help lines or cracking down on tax evasion.
  2. One less tax to deal with for companies and individuals should reduce administration costs (payroll can be a serious pain for small businesses).
  3. Removing NI and increasing tax on all income would stop people from trying to avoid tax by putting a limited company between themselves and their clients and taking profits as dividends (which aren’t subject to NI).
  4. Generally speaking, the simpler you make a system, the less likely it is to make mistakes.

The other reform would be to use the scrapping of NI as an opportunity to simplify the pensions system, by giving everyone the basic state pension, instead of having all these complicated rules about how you earn ‘qualifying years’ and how many you actually need. I can’t help thinking that the current system costs more to administer than any benefit we derive by not paying everyone the full basic state pension.

How much would income tax have to go up by to compensate for the removal of NI? I’m not sure, but it would be less than the rate of national insurance because NI is only levied on earnings—i.e. wages from employment and self-employment profits. As a result, the Treasury would see an increase in tax receipts on sources of income which are not currently subject to NI, such as dividends, which would partly offset the necessary rise in tax on earnings.

How can this be sold to the public? One simple way is that anyone who is employed or self-employed will pay less tax in most cases, as their new rate of income tax will be lower than the existing income tax + NI levels on their earnings. Pensioners would presumably like the fact that they don’t have to have a degree in government administration to work out how much pension they’re entitled to. Small businesses will love the removal of the ‘tax on jobs’ and ‘administrative nightmare’ that is employer’s NI contributions.

Who will lose out? Well, a few consultants who currently use a company to avoid NI might complain, but that’s their fault for avoiding tax in the first place. Pensioners might pay a bit more tax, as they don’t currently pay NI, but that can be rectified by giving them a higher personal allowance and rich pensioners will just have to feel the pinch.

Now, the only question remaining is how do I set up a meeting with Darling, Osborne and Cable to convince them to take my genius idea on board, or at least appoint me as their Chief Tax Reform Adviser?