Simplifying the Tax System
I have, for a long time, been arguing for a simplification of the tax system to make it more understandable, less bureaucratic and more fair, as you can see from my Budget Speech in 2007.
Although I accept that schemes such as the tax credit system have helped many people who are less well-off, I firmly believe that it would be far more effective to simply remove all income taxation from those on the lowest wages. I would compensate for this loss of revenue by raising the taxes on the wealthiest and creating a more progressive system with more tax bands.
I recently tabled some Parliamentary Questions in order to inquire as to what effect the type of changes that I would like to see would have on overall tax revenues.
The first question, and answer from the Minister, was as follows:
Lynne Jones: To ask the Chancellor of the Exchequer what estimate he has made of the cost to the Exchequer of raising the personal tax allowance to (a) £7,000 and (b) £9,000. [262989]
Mr. Timms: Estimates of the cost of increasing the personal allowance can be approximated from table 1.6 ‘Direct effects of illustrative tax changes’ on the HM Revenue and Customs website at:
http://www.hmrc.gov.uk/stats/tax_expenditures/table1-6.pdf
The figures exclude any estimate of behavioural response.
From this table, we can estimate that raising the personal allowance from around £6,000 to £7,000 this year would cost the treasury about £0.5b. To raise the allowance to £9,000 would cost about £1.6b.
The second question, and answer from the Minister, was as follows:
Lynne Jones: To ask the Chancellor of the Exchequer what estimate he has made of the revenue which would accrue from the introduction of a 30 per cent. rate of income tax for a (a) £3,000 and (b) £5,000 income band lower than the threshold for the 40 per cent. rate. [263007]
Mr. Timms: The estimated full year revenue yield for 2008-09 of introducing a 30 per cent. rate of income tax on a band of taxable income between £31,800 and the basic rate limit of £34,800 is £1.1 billion, and between £29,800 and £34,800 is £2.0 billion.
These estimates are based on the 2005-06 Survey of Personal Incomes projected forward using pre-Budget 2008 assumptions. It excludes any estimate of behavioural response and assumes the rate of tax on dividends is unchanged.
This answer demonstrates that adding an extra band of tax between £31,800 and £34,800 would eaily cover the cost of raising the personal allowance to £7,000 and inserting this 30% band between £29,800 and £34,800 would cover the cost of increasing the allowance to £9,000.
These calculations do not even factor in the money saved in tax credits to people on low wages who would benefit from the increase in personal allowance. This demonstrates that the type of system I favour is financially viable and I hope this leads to the Government considering changes to make the system fairer and simpler.
