The best way to have a good idea is to have lots of ideas.
The British tax and benefits system is something I spend a lot of my free time thinking about. Why? Would be a rational question to ask. Well put simply the taxes and benefits are really important and the British system is really complicated:
Important + Complicated = Interesting
As the “Part 1” in the title suggests this will be first of a series of post on how we could rebuild the tax and benefit system to make Britain a better place for everybody. But first a disclaimer, I am not an economist, or a politician, I’m an engineer. My interest is in systems, the effectiveness and their workings, I have no particular agenda to promote. However, like all research my work is coloured by my own experiences and beliefs. Please fell free to disagree with any or all my suggestions on the basis of their technical merit, but keep your politics to yourself.
Characteristics of a better tax and benefit system
Before we can address what could be changed, a few basic principles are needed:
Each of these principles is a little vague, but hopefully we can build off these principles to some more concrete changes in later posts. But first, let look at the current tax and benefits system and some of its flaws.
The current tax system
The current tax system is extremely complicated and covers about 15,000 pages. It is clear that such a long and complete set of documents can never be properly understood and have effective proof reading. This is how tax loopholes make it into law.
The tax take changes from year to year but the big picture is fairly constant as of 2013 the UK tax system looks like this:
Tax In £612 bn + £108 bn in Borrowing
|Tax||Amount (£bn)||% of total||Description|
|Income Tax||152.7||25%||Tax on money earned, £8150 tax free, then 20% up to £32,000, then 40% £150,000, 45% above £150,000. Slightly lower rates for saving and dividend income.|
|National Insurance||101.6||17%||Contribution from employee and employer, effectively a second Income Tax. 12% on incomes from £7,748 – £41,444. 2% Above that. Different rates for self employed and those in pension schemes.|
|Value Added Tax (VAT)||98.1||17%||20% Tax on the purchase of goods and services. EU sets minimum rate of 15%, but there are a long list of exceptions for food, children’s clothes etc. This has resulted in extremely complex laws where the government has, for example, had to define the difference between a cake and a biscuit.|
|Hydrocarbon oils duties (Fuel Tax)||26.8||4%||£0.5795 per litre of petrol/diesel (about 45% at current prices) . Lower rates for some other fuels, buses, agricultural fuel, and aircraft exempt.|
|Corporation Tax||43.1||6%||23% tax on company profits above £1.5M, lower rate of 20% for profits less than £300,000.|
|Council Tax||26.0||4%||Tax on homes used to fund local government, roughly bases on the value of the home, based on a range of bands (A-H in England). Significant variation across the country.|
|Business Rates||24.9||4%||Tax on non-domestic properties of 41.7% of the rateable value of the property|
|Stamp duty land tax||6.1||1%||Tax on buying domestic property of between 0 (below £150,000) and 15% (Above £2,000,000) depending on value, and non-domestic property of 1 to 4% depending on rental value.|
|Stamp tax on shares||2.8||<1%||Tax of 0.5% on the purchase of investments and shares over £1000|
|Tobacco duties||9.9||1%||Tax of 16.5% of retail price plus £176.22 per 1,000 cigarettes different rates for cigars and other tobacco products.|
|Vehicle excise duties||5.9||<1%||Tax on owning a car based on CO2 emissons, from £0 to £475 with higher rate on the first year of owning a new car.|
|Capital gains tax||4.3||<1%||18% Tax on the growth in value of assets sold or given away, rising to 28% once your income tax allowance has been expended.|
|Beer and cider duties||3.8||<1%||Complex list of rates based on how much alcohol is in the beer or cider|
|Inheritance tax||2.9||<1%||Tax on the assets of a dead person above £325,000 of 40% or 36% if a charitable donation|
|Wine duties||3.4||<1%||Complex list of rates based on how much alcohol is in the wine|
|Insurance premium tax||3.0||<1%||6% tax on insurance premiums. 20% for travel, car and appliance insurance.|
|Spirits duties||2.9||<1%||£28.22 per litre of acholhol in the spirit|
|Air passenger duty||2.6||<1%||Tax per passenger based on class and distance traveled, ranging from £13 to £188|
|Petroleum revenue tax||2.0||<1%||50% tax on “super profits” of oil companies|
|Betting and gaming duties||<1%||Seven different taxes on business usually around 15% but as high as 50%, National Lottery pays a lower rate of 12%|
|Land fill tax||<1%||Tax on sending material to landfill of £72 per tonne for active waste and £2.50 for inactive waste.|
|Climate change levy||0.7||<1%||Tax on energy to businesses 0.524p per kWh for electricity 0.182p per kWh for gas. Other rates for other pollution energy sources.|
|Aggregates levy||<1%||£2 per tonne tax on exploitation of rock, sand, gravel. Exported aggregates and those used in certain industries are exempt.|
|Bank Levy||1.8||<1%||0.088% tax on debts held by UK banks over £20 billion, with some exemptions. It is intended to reduce risky borrowing by the banks.|
|Licence fee recipts||3.1||<1%||Money from selling licences|
|Swiss capital tax||0.0||0%||Special tax on Swiss bank accounts, of 21% or 41% for people or businesses which have hidden money in the tax haven. Paying the tax gives immunity from prosecution for tax evasion. http://www.kpmg.com/uk/en/services/tax/personaltax/pages/uk-switzerland-agreement.aspx?gclid=CMmq17DIn7cCFZQZtAodrF8ASw|
|EU ETS auction receipts||0.0||0%|
As you can see we have a lot of taxes, many of them are made up of many different rates and sub-taxes. It is important to note that 3 taxes (Income, NI, VAT) make up 59% of the tax take, and that the deficit (the difference between income and spending) is 18% of the tax take, more than all the VAT or NI paid.
We can divide these taxes into four categories:
1) Direct Taxes – Taxes on making money, which are in some way related to how much money you make e.g. Income Tax
2) Indirect Taxes – Taxes on other activities, such as buying things e.g. VAT.
3) Behaviour Change Taxes – Taxes which exist to change behaviour by making certain activities more expensive
4) Business Taxes – Taxes which are on businesses rather than individuals.
Now lets look at spending. Because I’m only focusing on benefits I will assume that spending on everything else will remain the same. Here is a quick summary of how the government spends our money.
Spending Out £720 bn
|Tax||Amount (£bn)||% of total||Description|
|Welfare||220||31%||Benfits & Pensions|
|Debt Interest||51||7%||Paying back money borrowed|
|Defence||40||6%||Army, RAF, Navy|
So almost one third of the money collected in taxes is immediately given back to the people in benefits, this is clearly not efficient. In principle this should be money taken from the rich and given to the poor. But many of the rich and poor pay taxes, as well as receiving benefits. The net effect is money is moving in circles, with some being lost in the bureaucracy, and the tax burden appearing higher than it actually is.
If we break down Welfare Spending
|Benefit||Amount (£bn)||% of total||Description|
|State Pension||74||33%||Up to £5,728 per year if your are over retirement age, amount is linked to National Insurance contributions.|
|Personal Tax Credits||30||13%||Benifit for the poor with or without children, who have a household income less than £26,000 per year|
|Housing benefit||17||8%||Money to pay home rent (private or council) upto £20,800 per year but many caveats and conditions apply including the size and location of the house and household.|
|Disability living allowance||13||6%||Being replaced by Personal Independence Payment, between £1,092 – £6,989 per year to cover costs of long term ilness or disability.|
|Child benefit||12||5%||£1055 for first child and £697 for other children per year.|
|Pension credit & minimum income guarantee||8||4%||Suppliment to pension for poor pensioners of upto £8,499 for singles and £12,736 for couples|
|Income support||8||4%||For people with little or no income, rate varies from £2,953 per year to £5,850 depending on household situation.|
|Incapacity Benefit||6||3%||Being replaced with Employment and Support Allowance, for people who are unale to work due to injury or ilness. Upto £5,538 per year depending on your condition and and activities.|
|Council Tax Benefit||5||2%||Being replaced with council tax reduction, upto 100% off your council tax cost is being moved from central to local government.|
|Attendance Allowance||5||2%||£2,756 or £4,115.80 for disabled people over 65, based on needs|
|Job seekers Allowance||4||2%||At least £56.80 per week (£2,953 per year) for people out of work|
|Expenditure incurred by the Social fund||4||2%||A range of benifits for the poor, usaully to help with short term problems|
|Employment and Support Allowance||2||1%||From £56.80 to £106.50 per week for people who can’t work due to ilness|
|Statutory Sick Pay and Statutory Maternity Pay||2||1%||A propertion of your normal income if you are a new mother or are sick.|
|Carers Allowance||2||1%||£3107 per year if you are caring for someone with substainatal needs|
|Financial Assistance Scheme||-1||N/A|
|Industrial Injuries Disablement Benefit||<1||<1%||Upto £8403.20 per year if you have been injured at work|
|Severe Disablement Allowance||<1||<1%||Being replaced with Emplyment and support alllowance|
|National Insurance Fund||1||1%||Costs associated with National Insurance|
|Bereavement Benefits||<1||<1%||£2000 if your partner had died you are under state pension age|
|TV Licences for over 75s||<1||<1%||Free TV lincence worth £145.50 per year|
|Maternity Allowance||<1||<1%||Alternative to Statutory Maternity Pay|
Note: All the numbers in this post have been rounded, therefore percentages may not add up to 100%.
A quick look at this table highlights how distorted our perception of benefits is, for all the public talk of benefits for the out of work, or the disabled (real or fake), these benefits are small in comparison to Pensions, Tax Credits and Housing Benefit. In later posts I will focus on specific areas and how they can be improved.
Part 2 – Direct Taxes
Part 3 – Benefits
Part 4 – Indirect Taxes
Part 5 – Behaviour Change Taxes
Part 6 – Business Tax
Part 7 – Wrapping Up