Current and proposed tax/welfare systems

1. UK public/government spending

Source: Public Sector Finances Databank (version October 2012).


As a matter of basic fact and logic, a lot of so-called government spending is no such thing. Pensioners receive state pensions and other pensions (out of taxes which everybody pays in) and then pay tax on their private or occupational pensions; Council Tax; tobacco and alcohol duty. To some extent, they pay for their own pensions. Some higher earners receive Child Benefit, funded out of the taxes they paid themselves. Some lower earners receive Working Tax Credits and then a similar amount deducted from their wages in PAYE. It seems silly to count pensions, Child Benefit and Working Tax Credits as "spending" as they are merely tax rebates or "transfer payments". Some people pay in more than they get out and others get out more than they pay in.

2. Current system: tax revenues net of working age transfer payments

Please note:

i. This comparison does not include 'duties' (on fuel, booze and fags etc), it just includes the taxes which would be replaced under a half-way house flat tax system proposed below.
ii. Pensioner and child benefits have been treated as spending, but to give a fair like-for-like comparison, it is easier to treat working age benefits (various kinds of unemployment benefit and two-thirds of Housing Benefit) as tax rebates. Net taxes raised on this basis are £436 bn a year.


3. Proposed LVT/flat tax system net of personal allowances/Citizen's Income

To keep things simple, I have assumed that all the taxes in the table above would be replaced apart from a flat 20% income/corporation tax and LVT of approx. 3.5% of current selling prices (as a halfway house compromise tax system). Everybody can make up their own mind on the details (some might wish to retain Inheritance Tax or higher rates of income tax; others might prefer a contributory or means-tested welfare system; or a different balance between income tax and LVT etc) or how to manage the transition.

Total receipts net of transfer under the system proposed here (£439 billion) would be much the same as under the current system:

Notes:

1. Flat 20% income/corporation tax receipts.

Total income tax revenues are currently £158.7 bn, HMRC's Table 2.5 shows that if income tax on those earning over £50,000 a year were reduced to 20%, revenues would be £119 bn.
+ Value of personal allowance £60
+ Income tax breaks for pensions £20
+ Other minor tax breaks scrapped £6 billion
+ Current re corporation tax receipts £40 billion
+ Gross profits/wages will increase by the amount of VAT no longer payable = £99 billion x 20% = £20 billion
+ Gross profits of private businesses (or wages) will increase by the amount of Employer's NIC no longer payable by private employers = £45 billion x 20% = £9 billion
+ The current tax gap of £30 billion will be halved = £15 billion (we might even end up with a negative tax gap if international companies re-route profits through the lightly taxed UK).
+ Laffer boost to GDP and hence tax receipts would be at least ten per cent, increase total by ten per cent £29 bn
= Total £318 billion.

2. The total rental value of business premises (actual rents + current Business Rates) is in the order of £90 bn a year, at least £40 bn is site premium (probably more).

3. Domestic Rates = approx. revenues from here.

4. Agricultural rates would be a tiny figure, subject to a wide margin of error. This estimate is based on an average of £20 per year per acre of usable agricultural land, workings here.

5. Banks can earn a 2% interest margin between loan and deposit interest rates in their sleep due to their privileged position, deposit guarantees etc. So a tax of anywhere up to 2% would have no negative impact on actual bank lending/deposit taking. UK banks currently boast that their balance sheets are £6,000 billion, so to get things started, increasing the bank asset tax from 0.075% to 0.5%. Banks will then shrink their balance sheets; the rate will be increased etc. In any event, this £30 billion is only half the amount which banks claim they pay in tax every year.

6. There are just under 40 million working age adults in the UK (aged 18 to 64), who would be entitled to claim the Citizen's Income at the current Income Support/Employment Support Allowance weekly rate of £73.10. Those in work can waive this and claim a personal allowance for income tax purposes of £19,000 (which has the same cash value as the Citizen's Income).

7. This all leaves a balance of £439 bn to fund other central government expenditure, the same as under the current system.