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Flat Rate Income Tax/Simplification of Benefits

Comment 5th July 2010

Our Income Tax system has become highly complex, particularly when allied to the benefits system. The cost of collecting tax and distributing benefits takes up far too high a proportion of the taxpayer's money and must be reformed.

Here are my suggestions. Please read them in the vein of ideas rather than firm proposals, as nobody outside of the Treasury could know the exact numbers involved. My main theme is simplicity and ease of administration, with consequent benefits to the tax bill.

Let's start with people on low incomes. I would suggest that a person on low incomes (say under 15,000 p.a) should pay no income tax, although should contribute to the NIC fund to help towards the cost of the NHS and the pension pot. However, in return, the income support benefits should be switched off. The net effect to the individual should be slightly positive, but the effect on the cost of administering their account would be highly beneficial.

For all people that fall into the income tax net, I propose  two flat rates of tax for all. People complain that the rich can afford to avoid taxes altogether, whereas the poor are trapped. My idea is to make the tax system so affordable that nobody bothers to avoid it. For example, from £15,000-99,999 people might pay 20%, and for £100,000+ say 25%. Tax and NIC would continue to be collected at source, and each taxpayer would file their annual return to deal with any other sources of income. No other costly-to-administer benefits (married people, child support) would accrue to this group. The benefits system will be refocussed only on those in genuine need of help, and might more usefully be distributed by local rather than central government as community intelligence could be a great help in weeding out the undeserving.

There would be serious penalties for those who refuse to pay their tax.

As a final incentive, I would suggest a national lottery-type draw to be held every month. All national insurance numbers would be entered and one in every thousand drawn out. These individuals would pay no tax for the next twelve months. It would appeal to the gaming nature of the British mentality and introduce an element of chance which might help allieviate the depression of 'death and taxes being the only sure things in life'.

Why does this matter?

At these rates I think people would be happy to stump up their fair share and talented people would want to come and work here, creating value for our economy. We would incentivate entrepreneurs to create businesses and jobs and wealthy corporates and individuals to invest in our country and squash the industry that has grown up around tax avoidance (and the opposite industry inside the Treasury that has been set up to counter it at vast cost). It costs 10%+  to avoid tax once all the investment vehicles have been set up and advisers been paid, and there is always the risk of comebacks or costly inspections from the Treasury. Reasonable rates of taxation should incentivate all to contribute both to the public purse and the ongoing economic health of the country. Finally, a more transparent and simple system would be far cheaper on the public purse and would help to balance the deficit we are currently struggling under.

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