Designing The Perfect Tax System

We can dream, right?

Contrary to many ideas people might have about me I’m actually extremely progressive. So progressive that I think the rich should have to pay for everything. Well, everything we get from government that is. This makes me more progressive than the governments of Sweden, Denmark and Norway - and certainly more progressive than any British leftie.

But then you know us classical liberals. We are, have always been and always will be, on the left - on the side of the working bod and not the elite. The modern problem is that the self-selecting elite have taken charge of the State - and all the patronage that flows from that - and so they soak the working bod to pay for Tarquin and Jocasta. After all, anyone so named can’t be expected to go into an actual workplace, can they? Be laughed out before they’re able to show they’re also not capable of doing anything. Thus jobs on the government florin with the money directed by Moms and Pops in the patronage machine.

So, that perfect tax system. As Adam Smith said, tax should be - well, he actually said no great harm in but let’s run with it - in more than proportion. So, we’re happy enough with rising tax rates as income rises. Richer people can pay more in tax, yes, but also more as a percentage of their incomes. We’re in favour of a progressive tax system then.

But we’re also in favour of the working bod. This means that we don’t want to tax those who’ve not got much. Thus my long term - couple of decades now and we even won around 2010 - insistence that those on or below minimum wage should pay no income tax nor NI (which is, after all, merely a disguised income tax). We can, given that we are here dreaming about perfection, go on to say that income taxation should return to what it was many decades back. Something that affects the middle classes and above. So, say, the personal tax allowance is something around the median wage. £25k to is it £29k in this inflationary environment?

We should, obviously, reform council tax and all that, make it a proper land value tax. Yes, this will mean more revenue from wealthier people but also much less from business rates. Rates are currently charged upon what is on the land and LVT is the land value only.

VAT, well, hmm. Happy enough to keep it - consumption taxes are good - as something upon luxuries. Don’t mind if that’s at the choccie biccie/not choccie biccie interface as now. But would prefer it to be higher. McLarens, yes, Citroen Amis no sounds better to me.

Wealth, transaction and corporate taxes are truly bad taxation styles so all of those have to go. We keep taxes on bad things - Pigou Taxes. So tabs, booze, APD, fuel duty, they stay.

At which point we’ve a properly progressive taxation system. We tax those things which have external costs, we tax the one thing that has zero (or close enough) elasticity of supply, land, and top up with what we can squeeze out of the incomes of the middle class and above.

We also know that there’s a limit to how much we can do that.

The country is more dependent on the wealthy than ever before; the top 1pc of income taxpayers pay 29pc of all income tax, and the top 10pc pay 60pc of all income tax.

The academic research is that revenue collection tops out at a tax upon incomes - note, tax on incomes, not income tax, so IT plus NI of both employee and employer types - of about 54%. That’s the Diamond and Saez paper. The claims that it’s up in the high 70% are tossery - that’s assuming that there are no allowances.

Transport links are much improved almost everywhere. The world is dramatically more mobile for the super-rich than was the case in the past.

There are also many more desirable places for tax exiles to live nowadays. Countries like Italy, Greece, Switzerland, UAE and Portugal offer attractive arrangements for entrepreneurs and investors from overseas. And there remains the traditional list of tax havens like Monaco, Bermuda and the Channel Islands.

In this definition of the word allowances being able to leave the taxing jurisdiction is an allowance.

OK, so we’ve now that logically and morally perfect taxation world. We tax the bads plus the one non-distortionary tax. Everything else has to be paid for by those on higher than average incomes - the rich.

Some will think this a fly in the ointment that this won’t raise anywhere near the current tax take. This perfect tax system would gain 15% of GDP, might manage 20% and probably wouldn’t more than 25%.

But it would be highly progressive and logically perfect. So, we’ll just have to cut government expenditure down to 25% of GDP, right? Or 20%.

At which point I have a favour to ask. Once we make this morally righteous and just change can I be in charge of firing everyone.

Please?