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16 October 2010

Death and Taxes

Tag(s): People, Politics & Economics

              “But in this world nothing can be said to be certain, except death and taxes.”

                                                                                                   Benjamin Franklin 1706-1780

While there has been a change in government one thing that has not changed is that we pay ever more in tax.  Some describe this phenomenon as “Every penny you earn belongs to the government, except what we let you keep.”

I recently attended a lunch with David Gawke MP, the new Exchequer Secretary to the Treasury, or Minister of Tax if you like. His vision for the British tax system is that it should be a national asset not a liability. It should assist in the process of attracting foreign investment not just because of its competitive rates of tax but also because of its simplicity of operation.  Under New Labour the tax code more than doubled in size and exceeds 11,000 pages.

Mr Gawke's vision is

·         Competitive rates of taxation

·         Simplification of the tax system

·         Stability and predictability of tax policy

·         Streamlined reliefs and exemptions

·         Drastic reduction in the tax code

In questioning Mr Gawke was asked to confirm that in Treasury parlance a cut is a cut when it’s not a cut but a reduction in forecast even if this is an increase. Mr Gawke confirmed that this was the case. Thus if the previous government had planned to increase expenditure on new hospitals from £30bn to £50bn and the new Government planned to increase it to only £40bn this would be reported as a cut. This is highly relevant because current expenditure is set to rise not only this year but throughout the life of this Parliament. But you would never know it from the reporting of the media or the lamentations and gnashing of teeth of the Trade Union leaders. Thus total spending in the current year is estimated at £661bn vs. £631bn in the previous year and £576bn in 2008-9. Next year it is set to rise to £681bn, an increase of over £100bn in just three years. Of course there will be cuts in specific areas because the Coalition Government has decided to ring fence some areas like Health and Overseas Aid while other areas are the result of previous failures like unemployment benefits and interest cost on the debt. The latter is over £42bn alone this year which is equivalent to the total defence budget and would be enough to take  millions of people out of income tax altogether. And I am concerned about the plans to make our university students take on even more debt just because that is not charged to the public sector borrowing requirement.

Another asked about rates of taxation and, while Mr Gawke clearly wants to lower these, for the time being the Coalition Government has accepted the new top rate rising to 50%. This means of course that the new top rate of marginal taxation reaches 61% when you factor in National Insurance. Personally I am quite unable to distinguish Income Tax from National Insurance. It then rises to 66% at £100,000 where all personal allowances have  been withdrawn. Mr Gawke spoke of the Laffer curve which demonstrates that as tax rates rise so tax income falls as the incentive to work is reduced and the rich find more ways to avoid tax including moving offshore. He had met Arthur Laffer recently, the fabled economist to whom this work is attributed, and Laffer was clear that the UK is now on the wrong side of this curve.

An American in the group who has lived here for many years asked if it was still seen as acceptable to borrow money from foreign banks to give it as foreign aid. Gawke held the party line here about honouring commitments that have been made at international conferences and the moral argument for developed nations to help developing nations. I would find this easier to understand if I did not see so much of DFID’s budget going to help China and India which both have nuclear weapons, surely one definition of a developed nation while almost none goes to Latin America.

A tax accountant called for an improvement in competence in HMRC. Huge costs were incurred by both sides because of mistakes in the first place leading to an endless exchange of correspondence. Mr Gawke agreed and added that this had been further compounded by Gordon Brown’s invention of tax credits which had led to vast inefficiencies and failings in comprehension.

Finally a questioner observed that none of this would change without a massive change in culture not only in HMRC but in much of the public sector. Labour bureaucrats had been parachuted into running Quangos, health authorities etc., had paid themselves vast salaries and failed to deal with basic inefficiencies.

I shared these thoughts with a long term American correspondent of mine who replied as follows:

“Unfortunately, we have you beat in terms of complexity (see info below).   One of the useful measures of whether a tax system has moved beyond the “tipping point” is both the cost of and the likelihood of taxpayer compliance with it.   I’m guessing that there has been a steady growth of non-taxable “barter” or off-books exchanges of goods and services in both the UK and the US as the tax laws have crept into the far corners of every daily transaction.


According to the US Government Printing Office, the US Tax Code is 13,458 pages in total.  You can order a complete set of Title 26 of the US Code of Federal Regulations (that's the part written by the IRS), all twenty volumes of it, at the bargain price of $974, shipping included.  The full text of Title 26 of the United States Code (the part written by Congress) is a mere 3,387 printed pages (available for an additional $149, shipping included), bringing the adjusted gross page count to 16,845.

There have been more than 15,000 changes to the US tax code since 1986, the last time widespread tax reform was enacted.  Even with the availability of tax-preparation software, all those changes haven't made April 15 any easier for us.  According to its final report, the President’s (Obama) Economic Recovery Advisory Board said that taxpayers and businesses spend 7.6 billion hours and shell out billions of dollars trying to comply with tax-filing requirements. The costs were roughly equivalent to 1 percent of the nation's gross domestic product, or about $140 billion, in 2008.

Our “Fair Tax” advocates in the US have regularly made their case that non-compliance (knowingly or unknowingly) with the current tax code adds about 30% to every compliant taxpayer’s annual bill.  Or stated conversely, taxes could be lowered 23% if everyone actually complied with the current code.  I don’t know much about the data that supports their assertion, but there sure seems to be ample anecdotal evidence that there is a substantive number floating around out there in terms of non-compliance.  Especially, when IRS audits only 8% of returns, at best.


Stay on the topic.  It has long-term potential!  (i.e. it will still be a hot topic when you and I are long gone!)”


I am also indebted to Americans for pointing out that the UK is the most heavily externally indebted nation in the G20. If you go to data are from the US Treasury/Fed/World Bank etc. On the RHS you will see the data for other countries which will be initially set to “internal”. Click on “external” and see which major economy has the highest external debt relative to GDP.


So when Mr Osborne makes his announcement about the Comprehensive Spending Review next Wednesday, 20th October as to where the so-called axe will fall at least consider the mountain of debt he faces.


Copyright David C Pearson 2010 All rights reserved

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