Recent debates about fairness in the UK tax system have tended to centre on tax rates as they have traditionally done. It makes for good political headlines whether one is increasing or decreasing tax rates and headline rates translate easily when communicating with supporters and potential supporters.
However, when one looks at UK tax rates, and of course recognising that the development of separate taxing rights in different parts of the UK complicates matters somewhat, the current tax rate regime is definitely a bit of a blunt instrument. It is hard to address the nuances required of a progressive tax system when the structure of income tax rates bands is so unrefined.
Banded tax rates are a very unsubtle 20%, 40% and 45% as things stand and ignoring dividend rates. It’s hardly surprising that, when coupled with national insurance contributions on the one hand and tax credit entitlements on the other, the result is anything but sophisticated and progressive.
While easy-number headline rates may be politically desirable, they do not take advantage of the ability of computers to work out tax rates based on any number of rate bands and any percentage rates applicable within those bands. In the 1980’s multiple rate bands meant that taxpayers or their advisers would have to work absolutely everything out by hand and calculator. That is no longer the case or the norm.
For instance, a banded system with 10 rate bands running from 20% to 45% might achieve far greater social good without the cliff-edge downsides of the current system. That would have been impossible in the 1980’s but one would have to consider whether complexity in terms of multiple tax bands would necessarily translate into complexity in practice in the 21st century.
There are certainly arguments against this but we do have the capacity to use technology to re-address the issue in the context of a modern tax system.