Making tax simple

8 February 2012

Reform roundtable seminar introduced by John Whiting, Tax Director, Office of Tax Simplification, on Monday 6 February.

There is almost universal support for the idea that the tax system should be simpler. The current system appears excessively complex with, for example, the word “control” being defined dozens of different ways throughout the current tax code. Yet tax simplification is no easy task. If it was it would have happened by now. Simplification involves difficult judgements about how tax burdens should change, the risk of avoidance and evasion and how to manage the process of change.

To help with these choices the Coalition has established an Office for Tax Simplification (OTS). The work of this office was the subject of a recent Reform roundtable lunch with John Whiting, the tax director of the OTS, which was held under the Chatham House rule.

The lunch highlighted trade-offs involved in simplification. Complexity may be based on good intentions. Complex rules may, for example reflect a desire to close opportunities for tax avoidance. An example could be ensuring that people cannot avoid tax by being paid through share schemes rather than salary. Complexity may also reflect a desire to vary taxes by differences in circumstances, with the complex VAT system reflecting the very high number of zero-rated and exempt products.

Trade-offs in reducing complexity are made even more difficult when the process of change is considered. Frequent changes to the tax system are a major concern for business. The current tax system may have many problems but at least businesses are used to working with it. Yet this should not be seen as an argument for resisting changes that would improve the tax system – rather it highlights the need for changes to be transparent and free of political whim.

The lunch also highlighted the relative merits of gradualist and major reforms. The OTS focusses on a gradualist, or more bottom up, approach. This can encourage valuable changes – such as the more consistent use of definitions throughout the tax system and a simpler interface between the tax authority and taxpayers (administrative simplification). Yet while the work of the OTS has led to the abolition of 43 outdated tax reliefs, with a starting point of 1,042 reliefs this work has barely begun.

This highlights the limits of a gradualist approach. As Sir Roger Douglas, the former New Zealand Minister of Finance who substantially simplified their tax system in the 1980s, has noted: “do not try to advance one step at a time – quantum leaps will be required where you remove privileges of various groups all at one time. It is simply harder for them to complain this way.” Making quantum leaps will require asking hard questions: such as do we need certain taxes and reliefs and, if they serve a useful role, could this role be provided for in other ways?

It is important that Ministers, officials and commentators stick with the task of tax simplification. A simpler tax system could support growth and lead to fairer taxes. Businesses would be able to focus more on growth, jobs and exports and less on complying with taxes. Tax burdens would be less arbitrary and not based on the ability to pay for tax advice. Taxes would be easier to administer.

The complexity of the current system leads to many taxpayers, especially SMEs, being intimidated. Yet intimidation is not healthy – at the end of the day all tax systems rely on people complying with their obligations voluntarily. (Monitoring all taxpayers’ accounts in great detail is simply not possible.) By encouraging voluntary compliance a simpler tax system, where rules and processes are clear and understood, would improve the health of the tax system. This would benefit us all.

 

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