Tax and Transparency

Of course, I should be doing my tax return.

Instead, I’m thinking about tax in the abstract.

It’s no secret that our tax system is broken. Broken here, in the UK, and just as badly broken in most other countries of the world. The strongest evidence is that in most countries, despite tax systems that are intended to be progressive,  the rich pay proportionately less tax than the poor.  They manage to do so because tax systems are too complicated, so that at high tax levels (I didn’t say the rich pay less tax than the poor, although, in aggregate, they do, because there are fewer of them, but that they pay proportionately less) it is worth paying a tax professional to reduce one’s tax bill.

The viability of professional tax-reducers is a strong indicator of an over-complex tax system. The more numerous and successful the tax profession in a broadly compliant economy, the more complex the tax system.

So why is tax so complicated? I think the main reason is that we tax the wrong thing. Tax is levied (mainly) on  income, which seems – at first sight –  eminently fair. But what is income? If you get paid a salary, or dividends from savings, it’s easy to see – it’s the big number on your payslip. But if you run any sort of business, you can deduct your business expenses. What’s allowable?  This is the first area of fertile ground for a tax professional.

Now, what about capital gains? So we have to invent a whole new tax to cover capital gains, because capital gains aren’t income.  Depending on whether capital gains tax is more or less than income tax, tax professionals can be called in to classify every receipt into its most favourable category.

Instead, in my opinion, we should be taxing cash flow. Cash flow is clear and easy to define and to measure. There’s no need to distinguish cash realised from disposal of an asset from cash in a paycheque.  For individuals, the only deduction would be cash invested, either as equity in a corporation, or into bonds.  In this radical new world, because it is radical, corporations wouldn’t pay any tax at all: but, instead, would be required to be *totally* transparent.  All money leaving the corporation (whether as salaries, dividends, bond interest, or on the sale of stock) would be taxable.

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