The Single Income Tax Income Single The The Single Income Tax Final report of the 2020 Tax Commission 2020 Tax Commission The TaxPayers’ Alliance 55 Tufton Street, London SW1P 3QL 0845 330 9554 [email protected] www.2020tax.org The 2020 Tax Commission is part of the TaxPayers’ Alliance, a Company Limited by Guarantee in England No. 04873888 © The TaxPayers’ Alliance 2012 Published May 2012 ISBN 978-0-9563920-2-2 Cover image: The Payment of Taxes by Georges de la Tour, c. 1624 (photo: akg-images/Erich Lessing) Designed by Soapbox, www.soapbox.co.uk Printed by Impress Print Services, www.impressprint.net £50.00 The Single Income Tax Final report of the 2020 Tax Commission May 2012 Chairman: Allister Heath Commissioners: Andrew Allum, Richard Baron, Kevin Bell, Rosemary Brown, Mike Denham, Martin Durkin, Matthew Elliott, Anthony J. Evans, David Frost, Graham Hampson Silk, Graeme Leach, Andrew Lilico, Mark Littlewood, Douglas McWilliams, Fraser Nelson, Stephan Shakespeare Chief Economist: David B. Smith Principal Editor: Matthew Sinclair Lead researchers: Rory Meakin, John O’Connell Other contributors: Eamonn Butler, Scott Corfe, Arvid Malm, Tom Packer, Matt Ridley, Bilal Sambur, Nima Sanandaji, Tino Sanandaji, Corin Taylor, Tom Welsh Contents Prologue To create the conditions for stronger economic growth and more jobs, while treating taxpayers fairly, the Government must reform taxes to make them lower, simpler and more transparent. To achieve this, the 2020 Tax Commission recommends the Single Income Tax, which can be introduced in six steps: 1. Taxes should be cut to 33 per cent of national income 2. Marginal tax rates should not exceed 30 per cent, and the personal allowance should rise to £10,000 3. Taxes on capital and labour income disguised as business taxes should be abolished, and replaced with a tax on distributed income 4. Transaction, wealth and inheritance taxes should be abolished 5. Other consumption taxes need to stay for now, but transport taxes should be cut 6. Local authorities should raise half of their spending power from local taxes TaxPayers’ Alliance | Institute of Directors 3 Contents 5 Contents Prologue 3 Forewords 15 Allister Heath, Editor of City A.M. and Chairman of the 2020 Tax Commission 16 Matthew Elliott, Co-founder and Chief Executive of the TaxPayers’ Alliance 18 Graeme Leach, Chief Economist and Director of Policy at the Institute of Directors 18 Biographies of the Commissioners 19 Allister Heath, Editor of City A.M. and Chairman of the 2020 Tax Commission 20 Andrew Allum, Co-founder and Chairman of the TaxPayers’ Alliance 20 Richard Baron, Head of Taxation at the Institute of Directors 20 Kevin Bell, Chairman of Maitland Political and Trustee of the Institute of Economic Affairs 20 Rosemary Brown OBE, Chairman of the Gabbitas, Truman & Thring Educational Trust 21 Mike Denham, Research Fellow at the TaxPayers’ Alliance 21 Martin Durkin, Managing Director at WAG TV 21 Matthew Elliott, Co-founder and Chief Executive of the TaxPayers’ Alliance 21 Anthony J. Evans, Associate Professor of Economics at ESCP Europe Business School 21 David Frost CBE, Chairman of the National Centre for Entrepreneurship in Education and Trustee of Ufi Charitable Trust 21 Graham Hampson Silk, Chairman of Hampson Holdings 21 Graeme Leach, Chief Economist and Director of Policy at the Institute of Directors 22 Andrew Lilico, Director and Principal at Europe Economics 22 Mark Littlewood, Director General of the Institute of Economic Affairs 22 Douglas McWilliams, Chief Executive of the Centre for Economics and Business Research 22 Fraser Nelson, Editor of The Spectator 22 Stephan Shakespeare, Co-founder and Chief Executive Officer of YouGov plc 22 6 Contents Matthew Sinclair, Director of the TaxPayers’ Alliance 22 David B. Smith, Beacon Economic Forecasting and Derby Business School 22 1. Recommen dations 23 1.1. Implementing the 2020 Tax Commission’s overall proposals can be practical, productive and fiscally responsible 27 1.1.1. The overall economic results of the 2020 Tax Commission recommendations 27 1.1.2. Timeline for the transition 30 2. Taxes in Britain are too high and have become increasingly complicated 33 2.1. Governments have to pay for their spending by taxing, borrowing, printing money or owning assets 34 2.2. Taxes and spending rose substantially in developed countries over the 20th Century 35 2.3. Taxes in Britain are far too high 41 2.4. Britain’s taxes are highly and increasingly complicated 44 2.5. Many earlier reviews have found there is a strong case for significant tax reform 52 2.6. There are a number of different ethical approaches to understanding taxes and spending 53 2.6.1. Utilitarianism sets as an objective the maximisation of utility across the whole population 54 2.6.2. Deontology bases ethics on duties 54 2.6.3. Virtue ethics focus on the virtues we should have and on what constitutes a virtuous life 55 2.6.4. Libertarianism aims to minimise coercion 55 2.6.5. Religions have their own philosophical perspectives 56 2.7. Tax evasion is immoral as well as illegal, and in some cases legal tax avoidance is also immoral; but governments have a responsibility to minimise the opportunity to avoid taxes 56 2.7.1. General anti-avoidance rule 58 2.7.2. Alternative minimum or ‘tycoon’ tax 59 3. Taxes should be cut to 33 per cent of national income 63 3.1. There should be an upper limit on the level of tax 64 3.1.1. There is a limit on the amount of tax that can sustainably be raised 64 TaxPayers’ Alliance | Institute of Directors 7 3.1.2. Under a range of philosophical perspectives, taxes become unethical beyond a certain level 73 3.2. There is a limited set of legitimate objectives for government 104 3.2.1. The maximum justifiable level of public spending is 35 per cent of national income 104 3.2.2. High and redistributive taxes cannot be used to promote happiness 108 3.2.3. It is legitimate to spend a limited amount to support essential services 110 3.2.4. It is legitimate to spend a limited amount to support other services, but less so as the marginal benefits diminish as spending rises 111 3.2.5. It is legitimate to spend a limited amount to support those in need, but not with an overly generous welfare system that creates dependence 112 3.2.6. It is legitimate to spend a limited amount to promote opportunity 113 3.3. You spend your money better than government will 118 3.3.1. Value for money tends to be higher in the market sector than the public sector, and higher within the public sector when it is a smaller share of national income 119 3.3.2. Money taken in taxes is often captured by rent seeking special interests 125 3.3.3. Money taken in taxes is often captured by the bureaucracy 127 3.3.4. People tend to donate more to charity in countries with lower taxes 129 3.4. Economies with larger market sectors grow faster 130 3.4.1. Early cross-section studies showed that economies with larger market sectors grew faster 130 3.4.2. Modern panel data studies show that economies with larger market sectors grow faster 132 3.4.3. Econometric modelling shows that economies with larger market sectors grow faster 136 3.4.4. Neo-classical macroeconomics suggests countries with larger market sectors will have a higher level of income; Post-Neo-Classical Endogenous Growth theory suggests countries with larger market sectors will have a higher level and growth rate of income 140 3.5. Tax reform is only sustainable if it cuts the overall burden of tax 143 3.5.1. Public opinion surveys suggest there would be support for tax reform that cuts overall rates 144 3.5.2. Public opinion surveys suggest people are more likely to support tax reform that cuts their own rates 147 3.5.3. The political history of tax reform suggests that the most successful tax reforms are those associated with cuts in the overall burden of tax 150 3.6. Spending should be cut to 33 per cent of national income, too 164 8 Contents 3.6.1. In some regions spending is particularly high and crowding out the private sector 165 3.6.2. Public sector debt is a large and growing burden on taxpayers and the economy 169 3.6.3. Fiscal adjustments pursued through lower spending are more effective than those pursued through higher taxes 181 3.6.4. The tax system proposed in this report can deliver revenues equivalent to 33 per cent of national income 183 3.6.5. Other policies are needed to support restraint in public spending 184 4. Marginal tax rates should not exceed 30 per cent, and the personal allowance should rise to £10,000 189 4.1. Higher taxes reduce the incentive to work and invest 190 4.1.1. The 2020 Tax Commission’s proposals will cut marginal tax rates for families and businesses 190 4.1.2. Cutting marginal tax rates will deliver a stronger economy 195 4.1.3. There is a massive deadweight loss from investments that aren’t made and work people don’t do because high taxes reduce the return 214 4.2. Higher marginal rates can create sufficient economic disruption that the resulting revenue is underwhelming, or overall revenue actually falls 216 4.2.1. Higher marginal tax rates on labour income reduce taxable income, particularly when levied on high earners, meaning that revenue is often underwhelming 217 4.2.2. Lower corporate taxes attract international investment and often increase revenue 225 4.2.3.