A Fair Tax for All May05
Taxes finance public expenditure. All of us pay taxes, especially indirect taxes on what we buy. International trade, internet trading, transfer pricing by multinational companies and use of tax heavens for anonymous deposits pose great difficulties for governments to impose and collect taxes.
National tax systems in the EU are unnecessarily complex. In the UK, there are three rates for income tax: 10%; 22% and 40%. For investment income, the equivalent rates are 10%, 20% and 40%, except for dividends, where they are 0%, 0% and 32.5%. On top of this, there is a parallel, though different, system of income tax by another name – National Insurance (NI). Capital gains are taxed in a complicated way with 39 potentially effective rates, depending on the type of asset sold and how long it has been owned. Interacting with all these tax rates are, of course, numerous allowances and exemptions.
Allowances and exemptions in current tax systems encourage unnecessary expenditure resulting in erosion of profits, taxes and dividends. Highly paid executives benefit disproportionately at the expense of both shareholders and taxpayers as they claim allowances for expensive company houses, luxury cars, first class air travel and tax-protected bonuses that vary significantly. These allowances neither promote corporate efficiency nor savings that can help increase capital, share value and dividends. For shareholders, there is no comparable relation between sales turnover, cost of sales, profits and dividends.
How can we have a fair tax for all that will minimise tax avoidance?
EU governments should employ a system of “Classified Turnover Tax” (CTT) for different classifications of employers and employees. Employers would incur tax on Corporate Sales Turnover (CST) and employees would be taxed on Taxable Personal Income (TPI) above the level of Untaxed Personal Income (UPI). Earned income, investment income and capital gain would be taxed equally as income. Exceptionally, inherited assets and capital gain on sale of owner occupied homes would be exempt from tax. Indirect tax on purchase of goods and services (VAT) would be an option for governments, especially to cover trans-national internet trade.
The CTT system would be as follows:-
For all employees including self-employed:-
UPI 012:- Income tax 0% for income up to £12,500 for age 0-60 years old
UPI 020:- Income tax 0% for income up to £25,000 for age 60 and more
TPI 100:- Income tax 20% for salary up to £100,000
TPI 200:- Income tax 30% for salary up to £200,000
TPI 300:- Income tax 40% for salary exceeding £200,000
Tax rates for Corporate Sales Turnover (CST) to be fixed for each sector:-
CST (A):- Manufacturing Industry
CST (B):- Farming
CST (C):- Wholesale distribution
CST (D):- Retail distribution
CST (E):- Catering & Cleaning Services
CST (F):- Financial services, including banking
CST (G):- Football Clubs
CST (H):- Airlines
A single tax on sales turnover of a business according to its classified sector would leave the rest of sales revenue as profit to cover cost of sales, capital investment and dividends. With no allowances or exemptions, businesses would be forced to minimise their cost of sales by efficient management of resources in order to offer maximum dividends to existing shareholders and attract new investors. Shareholders and new investors will be able to compare cost of sales of similar businesses to assess management performance of executive directors and managers. Multinationals and internet traders will not be able to use transfer pricing or tax heavens to evade taxes as sales turnover will be taxed in the country where the sale is transacted. Citizens will feel encouraged to insist that all sales are recorded as higher tax revenue collected by their government will assist funding of public services that benefit them
Governments of EU Member States will find it easier to set CST tax rates that best suit their economies facilitating the assessment for investment by domestic and foreign investors. The CTT system of taxation would inspire a culture of business economy and efficiency, provide incentive for individual savings and investments, ensure accounting transparency, minimise tax avoidance and promote competition for attracting foreign inward investment among the EU Member States.