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Time for tax reform – part 2

All Areas > Legal & Finance > Money Matters

Author: Roger Downes, Posted: Wednesday, 22nd September 2021, 09:00

Last month I suggested that maybe now was the right time for the most significant tax reform in more than a generation. The need to fund the government’s pandemic support programme was a golden opportunity to change the way our tax system works. But did the Chancellor ‘grasp the nettle’ with his announcement last month? Of course he didn’t.

The tax will apply to wages at almost every level

Instead, hiding behind the Prime Minister making the announcement, the Chancellor bottled it. He came up with a 1.25% levy that everyone will pay on top of whatever tax and national insurance they currently hand over. It will apply to wages at almost every level, self-employed profits and dividends.

To make things worse, businesses will have to pay an additional 1.25% levy as part of their employers’ national insurance payments too – just at a time when they need help in getting back on their feet following the withdrawal last month of furlough and self-employment grants.

Increasing these rates penalises the generation of wealth

The Chancellor has fallen into the same trap as others before him. Increase the rates of the main tax earners – employment and profits taxes – and it’s bound to swell the coffers isn’t it? I argue differently. Increasing these rates penalises the generation of wealth, whether it’s business growth or spendable personal income. It has a negative rather than a positive effect.

Instead of tinkering with the rates of tax, which incidentally the government said they wouldn’t do when elected, Rishi Sunak should have looked at the areas of the tax system that don’t raise as much as income and employment taxes. Increases in those areas would re-balance where his money comes from and the overall tax take would rise much more quickly than through tinkering with the rates.

Do I want the Chancellor’s job? Certainly not, but he can definitely do better.

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