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Fat Tax On The Menu

Jeremy Hetherington-Gore Unleashed
25 July, 2010

UK Chancellor George Osborne has unveiled plans for a new Office of Tax Simplification. The UK tax code - a somewhat amorphous concept since what is included depends on what you choose to call a tax - is said to be around 30,000 pages long. Again that begs the question of what you call a page, what size type, how many lines etc etc. Anyway, no-one questions that there is too much tax legislation, and every annual Finance Act adds another thousand pages or so. Even tax practitioners, who you would think might benefit from complex tax legislation, are complaining that it has become impossible to answer straightforward questions from their clients. And the Inland Revenue has taken to making up the rules as it goes along, for instance on tax residence, probably thinking to itself that since no-one knows what the law actually says any more, it may as well use whatever interpretation suits its purposes, which, surprise, surprise, is usually to extract more tax.

The UK is not alone in having an overgrown tax code. In the USA, no-one even seems to know how long the Tax Code really is. It has capital letters because unlike in the UK, there is something called the Tax Code, and you can even buy a printed copy of it from the government for a mere thousand dollars. President George W Bush said: "The tax code is a complicated mess. You realize, it's a million pages long." Most estimates though are down in the tens of thousands of pages. One of the problems in the United States is that Congress quite frequently tacks tax legislation on to other bills, being very often the only way of getting it through. Then of course there is State-level tax legislation as well.

For there to be any chance of simplifying and shortening the tax code in an advanced country like the US, the UK, France or Germany, you would first of all have to understand why tax legislation grows like Topsy, and the answer, inconveniently, lies in the word 'Democracy', ably assisted by public choice theory. Getting and keeping political power nowadays means taking the part of the innumerable groups, factions and interests that make up your constituency, whether that be a small patch of countryside (for a local councillor) or a whole nation (for the leader of a national political party). And the first thing that any group wants from its politicians is to pay less tax, whether the group is the motoring public, cyclists, commuters, train motormen (sorry, motorpersons), car manufacturers, gas station operators or bus companies.

And in that microcosm of just one part of human life (getting to work) you can immediately see the problem: these seven constituencies have conflicting interests from a fiscal perspective. Some people belong to more than one of those groups, as well. It's impossible to optimize a tax system to please everyone all the time; the best you can do is to please some of the people some of the time. But that doesn't stop politicians from trying. In the USA, where the system is best developed (and the tax code is longest) the game is famously played with 'pork', or 'earmarks', the little add-ons to a bill in progress that secure the votes of enough legislators to get the bill through. Then it has to go to the other House, and perhaps back again, each time gaining more weight. Certainly you could never have a saying in the USA that 'a rolling bill gathers no pork'.

What is to be done, then? Abolish democracy? As Winston Churchill said: 'Democracy is a very bad system. But all the others are worse.' No, we can't do that. So what we do is to invent new quangos called The Office of Tax Simplification or similar. Both Bush presidents did it; so did Bill Clinton. The only reason that President Obama hasn't done it yet is that he has been too busy making the Tax Code longer. Just give him time.

Reducing the number of countries would work, in terms of reducing the total amount of tax legislation, and possibly the total number of tax lawyers. The Romans proved that; but empire-building has become unfashionable lately. In fact it's going in the opposite direction: in the UK, regions like Scotland, Wales and Northern Ireland are all becoming more rather than less independent, and along with that independence goes tax-raising and spending power, with, yes, you guessed it, brand new regional tax codes.

Flat taxes work, too, and are even efficient at optimizing tax-gathering; but they are a non-starter in advanced democracies. The new, Eastern European members of the European Union got away with introducing them ten years ago because clever Harvard-trained economists slipped them through before domestic politicians had cottoned on to the usefulness of a bulky tax code. They are learning quickly, now, and one by one the countries with flat taxes are undermining or abandoning them.

So there it is: fat tax codes go along with fat people as shining achievements of our civilization. You'll just have to learn to love them.


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Jeremy Hetherington-Gore Unleashed

Jeremy tackles the difficult issues head on!


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