Monday, 27 July 2009

Tax doesn't have to be taxing. So why is it?

It seems to me that the tax system is one of the most important ways that a government interacts with its people. So what does our tax system say about the relationship between citizen and state in the UK?

Here are some widely acknowledged, and some lesser-known facts:

1 The poorest members of society pay a larger proportion of their income in tax than the richest.

Of course the richest do tend to pay more tax in absolute terms, but then the more money you have, the more you can stand to lose before it affects your quality of life to any real degree. Our system supposedly understands this, because income tax is progressive; whereby higher incomes attract higher tax rates. How do poorer people still end up paying more? Two factors: firstly, VAT, because everyone has to buy things, the rate is a single flat rate (currently 15%) and it does not, in contrast to its original intention, only apply to luxury items. Secondly, evasion and avoidance, which is much more possible if you are wealthy, as you have the means to travel, to employ experienced accountants, and often have less clear cut forms of income (eg share income, which comes under capital gains, rather than income tax).

2 In 2006 there were eleven prosecutions for income tax evasion, as opposed to almost 100,000 prosecutions for TV license evasion.

You've seen the adverts. So much as think about not paying your TV license and we will know instantly, and our enforcement squad will be down on you like a ton of bricks. What's more, it's true, a huge number of prosecutions are made, and the vast majority are successful. You'll likely also have seen similar adverts for benefit fraud. So you'd imagine then, that if people were evading income tax, the consequences would be similarly harsh. Wrong. HM Revenue and Customs are remarkably reluctant to prosecute those they suspect of tax fraud. The main difference is that tax fraud cases are often complicated, often marginal because of the myriad loopholes in the system, and the people responsible tend to be wealthy, possessed of expensive lawyers and are very determined to fight their corner. Of course, the majority of TV license cases are clear cut under the rather draconian law, and the evaders are almost always poor, ill-educated and unlikely to put up more than a token defense.

3 Under the Tax Credit system, 1/3 of the money available goes unclaimed. And of the claims that are made, 1/3 are overpaid.

Tax credits are a form of direct redistribution taxation, ie taking money from the wealthy and giving it directly to the poor. But why does the system require people on low incomes, the very people it is supposed to help, to pay their taxes first, before claiming back the money as tax credit? The one-third of people who do not claim are not only losing out on the extra money they are entitled to, but are not being refunded the taxes that they should never have paid in the first place. And even of those who are aware of the system, and have the time and inclination to fill in the forms correctly, one-third receive overpayments. HMRC are very fastidious in making sure that this money is repaid, in fact, in their eyes it is treated the same as unpaid tax. In truth, though, it is often their error, and the unfortunate recipient has often spent the money they received (understandable, given that they have been paid it in good faith, and being poor after all, could scarcely afford not to).

So what does this say about Britain? Simple. There is one rule for the rich, and quite another for the poor. If you are rich you can expect to pay less tax, even if you do not indulge in a little light evasion, and if you do, you need not worry about getting caught. If you are poor, then you have no power to do anything about it, so we will screw you for as much as we can get away with. We will rely on many of you not even claiming tax credits to balance the books, and if you do claim, by god you better play by the rules, and even if you do that we may take the money back off you, even if it's our mistake.

This, then is the reality of our Labour government. They do not stand up for the poorest in society, the truth is they are just as scared and mesmerised by the rich as any Tory government, if not more so. So, my question is this: who truly holds the power in Britain? The people with the democratic mandate, or the people with the huge pile of cash?

Next time: how the tax system should work.