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Political taxes do no one any favours

Labyrinthine tax laws were not created by accident – they serve the interests of the political elite.

Political taxes do no one any favours

Having recently completed my gap-fill qualifications, I found myself coming over all Carrie Bradshaw from Sex and the City and asking ‘just why does tax have to be so complicated? Wouldn’t it be better if people could understand it without having to ask an expert to explain it?’

The trouble is, taxes are designed to do many things, not all of which are equally popular. First and foremost, taxes provide the money for the government to spend on the services and support deemed essential for the UK population. Most people believe the government should provide support and services for UK citizens who need it.

However, they generally want to pay for the things they expect to benefit from and will resent funding things they have no use for. It is relatively easy to sell the concept of raising money for the NHS, but it is much harder to persuade young voters that they should pay more towards an old-age pension that may not exist by the time they come to retire.

Second, taxes can be used to encourage or discourage public involvement in certain activities. Pensions are, of course, a prime example of this. The current tax regime of exempt contributions, exempt investment growth and taxed income is designed to reward saving and limit over spending.

That is why a pre-paid expenditure tax system is not appropriate. ISAs are suitable for the short term as they allow easy access. Pensions are suitable for the long term because they do not.

Third, they can be used to implement the ideological and political agenda of the sitting government, including the need to get re-elected.

The current regime is capitalist in nature and naturally leans towards helping people to help themselves, rather giving generously to everyone, hence the repeated reference to ‘hard work’ in the chancellor’s latest Budget speech.

Ideological opposition

Privately funded pensions and personal savings fit within this scenario, as does freedom and choice. Footing an increasing bill for universal state pensions, even if it is deemed to be affordable, does not. 

The difficulty is that in a democratic system the government also needs to make itself popular (or at least not unpopular).

This makes it very loathe to implement changes that may be necessary but will be resented, such as raising the state pension age.

Things like this get held off until there is a clear problem rather than pre-empted before there is an issue and, ideally, they are hidden behind a plethora of other more positive stories so that no one will notice it is happening.

 

I have to wonder if one function of the fiendishly complicated UK tax system is to ensure most people have no idea how much they are really paying.

Take income tax, for example. People need income in order to survive, so it’s an obvious thing to tax, but some people earn more than others and are deemed able to pay more towards the costs of society.

Hence, we have different rates of tax for increasing bands of income. Seems reasonable, but that’s not all. We also have different allowances for different groups of people, and we have different income tax rates for different types of income.

Capital gains tax has been simplified somewhat, but inheritance tax has cumulations, gifts with reservation, potentially exempt and lifetime transfers. VAT can be exempt, chargeable or chargeable but at 0%.

Don’t leave it to the politicians

Can this really be about fairness, as the government would like us to believe, or does it have as much to do with popularity and short-term fixes to long-term problems?

There have, of course, been some attempts to cut through all of this. Pensions simplification in 2006 was anything but simple to implement, but would eventually have made things easier to understand if only they had left it alone after that, and auto-enrolment was the result of an independent review followed by cross-party support.

This is why I believe long-term issues such as pension provision should be removed from the political arena and based on proper independent research. Then all the chancellor has to do is balance the books based on the resulting numbers.

Should be easy...

Fiona Tait is technical director at Intelligent Pensions

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