One of the challenges of the tax system is how complex it is. And that’s not just in terms of the rules and sub-rules, but because it’s hard for people to really visualise what the limits mean. If someone proposes to raise taxes on everyone earning over £100,000 how many people does that affect? What should the threshold be for inheritance tax? And when we add in benefits the complexity compounds even further
A further problem is the way that inflation can erode the value of thresholds – for either tax or benefits. A tax rate that was originally meant to hit 5% of the population could end up hitting 20% after a few years of inflation (for example, the proportion of people paying higher rate tax has doubled in the last 20 years). The trouble with changes of this sort is that they effectively take place by stealth, rather than allowing us to have a genuine public debate about what level of tax we want.
A simple and elegant solution would be to have a single basic tax threshold and then to express everything else as a proportion of this. Conveniently, the tax rates that have been proposed to be in place in 2020 work out particularly nicely:
- Basic rate tax threshold: £12,500
- Higher rate tax threshold: £50,000
- Top rate tax threshold: £150,000
- Inheritance tax threshold: £500,000 (assuming the person owns a house, which seems a reasonable assumption if they have this level of assets).
So if we call the basic threshold N, we have thresholds of N, 4N, 12N and 40N. The same principle could of course be extended to the benefits cap, to thresholds for tax credits and for National Insurance. It’s immediately much easier to discuss. We have the top rate of tax set at a level that’s ten times the basic threshold. Is that right? Maybe it should be more, maybe less. Either way, the ratios are clear to see.
There are two further changes that would make the change even better. These are:
- Express all the thresholds in terms of multiples of the annual minimum wage (for someone working a typical full time week). The minimum wage is a much more meaningful threshold than the basic rate tax threshold as it would allow us not just to compare different taxes, but to relate them to how much someone on minimum wage would earn in a year. The numbers don’t work out quite as neatly (annual minimum wage in 2020 will be about £17,500) but we can see that, for example, the higher rate tax threshold will kick in for someone earning just under three time minimum wage. Is that right? Maybe it should be twice the minimum wage – or five times. But it’s an immediately relatable way. The benefits cap (for a single person outside London) is set at about 80% of minimum wage – right, or not?
- Formally link all the measures in legislation, such that when the minimum wage changes, all the others change too. At a stroke this would remove the ability of inflation to erode both taxes and benefits. Of course, Parliament could certainly change taxes – that’s a fundamental prerogative – but to do so it would need to be explicit: ‘we’re going to bring the higher rate threshold down from 2.9 x minimum wage to 2 x minimum wage’; or ‘we’re going to raise the inheritance tax threshold to 40 times the minimum wage’. Popular, or not? That would be for the people to decide.
In conclusion, by explicitly linking major taxes and benefits to multiples of the minimum wage, and enshrining those ratios in legislation, we’d create a simple and relatable system, that would ensure thresholds could only be changed in a deliberate and open way. The system is entirely compatible with either high or low levels of taxation – this isn’t a right/left issue – and would be a great way of creating transparency about what we pay and receive.