fredag 4 januari 2008

Income tax misery can be avoided

HMRCs site allows you to submit your tax return on line. You log in, fill in the information and submit. It is very clear and easy to use and you can save your work and log in again to continue, as many times you want until you have finished. Full marks.

Pity though that the notion that tax should be related to "ability to pay" is so entrenched. But what is wrong with "ability to pay"? First, in practice, it means that those with the deepest pockets have the ability to pay for the best professional advice and so exploit the inevitable loopholes in a system that equates "ability to pay" with "income".

The second thing wrong is the cost of the system, around £25 billion a year, which amounts to about 6% of the total collected.

The third thing is that it penalises work, thrift and honesty. There is a story about a Soviet commissar who was trying to gather crops from the newly established collective farms. His method was to ask how much they needed for their own use, and take anything more to the towns. Not surprisingly, the collective farmers didn't exert themselves to produce more than they were allowed to keep and the result was a food shortage. If, however, they had been told that they would be allowed to keep everything above a certain minimum amount produced, they would have had every incentive to work hard to grow what the commissar required, knowing that once that had been achieved, the rest was theirs. A similar tale talks of a shiekh who had a tax on palm trees and wondered why the farmers were cutting them down. When he replaced the tax with one on the value of the land, the farmers planted and there was abundant production.

Income tax is another one of these destructive taxes. It hits hardest at the margins and the best estimate is that it costs the country about £140 billion a year in lost production - what is known as "deadweight loss".

But while the wretched system persists, the authorities deserve credit for setting up a good piece of technology to deal with it. Not all the government's IT projects are disasters.

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