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Key points
- A tax system has an important function to play in a nation’s health.
- The UK tax code has increased in recent decades.
- Will the new chancellor and government embark on meaningful reform?
- Intangible assets are now more important than physical ones.
- Tax systems must begin to accommodate the new global and digital economy.
We can expect the endless conversations around this latest Budget to continue in print, online and in real life for some time. But what few are talking about is how we need far more than just tinkering at the edges: what’s required is a full-on tax revolution. The whole system is just not fit for purpose given the global village we now live and work in. When are we going to have proper joined-up thinking?
We can’t stress enough how important a nation’s system of tax is – societies are shaped by the way they are taxed. A large part of a nation’s destiny – whether its people will be prosperous or poor, free or subordinated, happy or depressed – is determined by its system of tax.
Where to start?
When it comes to finding shortcomings with the UK’s system of tax, it’s difficult to know where to start. There’s the sheer size of the code – at more than ten million words it is the world’s longest. Marcel Proust’s À La Recherche du Temps Perdu holds the Guinness world record for the longest novel ever written. The UK tax code is eight times longer (and considerably less readable).
Then there’s the complexity; there are loopholes, inconsistencies and inequities. While this might sometimes be good business for tax advisers, it is bad business for businesses. Charging someone a lot of money for something that is too complex to explain does not enhance the popularity of our profession.
The Hong Kong tax code, generally agreed by international tax lawyers to be the world’s most efficient (and look at the extraordinary growth Hong Kong enjoyed with this code in the second half of the 20th century) comes in at about 350 pages. It is a small fraction of the size of the UK’s.
The chancellor’s task
Above all else, the UK needs a chancellor who is dedicated to meaningful tax reform – almost ideologically so. And we stress ‘meaningful’. The last time the UK had a chancellor who could even remotely be described as such was between 1983 and 1989. Nigel Lawson made it his policy to remove a tax every budget, and did so six times. He also reduced the number of income tax bands to two.
But since then the amount of tax legislation has ballooned. Gordon Brown was the worst offender. The tax code trebled in size while he was chancellor. George Osborne came to power promising radical simplification, saying the UK tax code was ‘one of the most complex and opaque’ on earth. He even set up the Office of Tax Simplification. The tax code doubled again under his tenure.
Most politicians take the path of least resistance, which is to tinker round the edges while heading in the general direction of more taxes, greater complexity and higher rates. It takes a politician of rare strength and fortitude to attempt such reform. Is Rishi Sunak that man? This is a new government with a strong majority. The opportunity is certainly there.
The global view
Tax codes the world over have not come to terms with the new globalised, digital age in which we live. For centuries, economies revolved around the production and consumption of physical things – from cars to cows to grain to gold – and tax systems were built around that. However, in the late 1990s, investment in intangibles began to overtake investment in physical assets. The reason is scalability. An app need only be uploaded once, but it can be downloaded millions of times. If a system – Google’s search engine, for example – works, it can scale much more rapidly than anything a ‘physical’ company can offer, which requires the large-scale manufacture and distribution of goods. Thus, there is far greater growth in the digital economy. Today, the most valuable assets are non-physical and intangible – software companies, brands, intellectual property, operating systems, unique supply chains. Even money itself is no longer tangible.
Tax systems have not come to terms with this new globalised, intangible, digital economy. Where is the profit? Where is the point of sale? Where is the company? Where is the intellectual property? The answers to these questions are not always clear. Many tech companies are deliberately not profitable, instead pursuing market share and growth.
The result is that the digital economy goes relatively untaxed – and this has further enabled its growth.
The future of income tax
At present, income tax accounts for about 50% of government revenue worldwide. But income tax is built around an easily taxable long-term relationship between employer and employee – in the old physical economy.
The nature of work itself is changing. Increasingly, people are becoming freelancers. More people are working in the gig economy. More are working remotely, gaining employment in multiple jurisdictions. Technology has enabled the rise of the digital nomad. Choosing whichever country offers the lowest tax, the best internet connection and perhaps a spot of sun. Workers themselves are becoming digital. Income tax will become harder to collect.
Governments must come to terms with this new economy, and find a way of taxing it fairly, equitably and efficiently, otherwise they are in trouble. And, indeed, the inequality and resentment it creates means we are in trouble too.
Is our new Chancellor of the Exchequer thinking this far ahead? Certainly the Chartered Institute of Taxation, the Institute for Fiscal Studies and the Institute for Government hope so, as evidenced by their letter to Rishi Sunak on his appointment (tinyurl.com/uoksm4u).
Revolution or reality?
Well, there is a problem. We all felt rather good for a month or so not talking about one subject beginning with B… now we have a new subject – the coronavirus. This will have a stark impact on society, the economy, and may mean many of the plans will have to be delayed for a year. When we recover, our economy is going to need a kick-start. We’ll need a tax regime that helps push momentum forward, not hold it back. Can we hope to have the kind of wholesale tax revolution that can make this a reality? Maybe not – but it would be good if we could get at least part-way there.
