Editor's letter

ECA readers will be aware that I have a suspicion that things which are discussed in California are eventually implemented in these chillier climes.

If you have a bookcase containing (even basic) literature on income tax, capital gains tax, inheritance tax and tax planning, you will find that it will be sufficiently heavy to break the shelf off the wall. Tolleys’ Yellow Tax Guide all on its own is more than 7,000 pages in length. The government's idea of ‘tax simplification’ appears to be to make it simpler for them to collect more tax rather than simpler to understand.

The tax guides in countries such as Romania, Slovakia, Georgia, Latvia, Russia and Estonia are considerably simpler. Their basic tax rules – the equivalent of Tolleys’ Yellow Tax Guide – would fit on the back of a postage stamp or at least a very large postage stamp from one of those countries you have never heard of, but which appears to make a mint out of selling large quantities of picturesque, colourful scenes.

The reason why the tax codes in these countries are so simple is that they have followed the advice of the flat-rate tax guru, Alvin Rabushka. He is a Californian academic (who looks rather like a stereotypical rocket scientist) based at Stanford University's Hoover Institution. He is not to be confused with ‘flat earthers’.

Broadly under Rabushka's ideal system, income is all taxed at a fixed low rate. There are no exemptions and no progressive tax bands. The rates currently range from 13 per cent in Russia to 33 per cent in Lithuania but average about 20 per cent. As with Jersey and Guernsey, the flat-rate tax has become very popular in all the ‘introducing countries’.

The country which introduces the tax first, gains a competitive advantage in several ways. First, it is simpler to understand.

Second, lots of accountants and tax lawyers are put out of business. Third, lots of bureaucrats are put out of business as well.

The accountants appear to go off and start running their own businesses along with former bureaucrats and ex tax lawyers.

And, there is apparently a new willingness to work harder which increases economic growth, jobs, general well-being and also savings. The savings point could have particularly useful implications for a nation suffering from a pensions problem. Apparently under a flat-rate tax, rich people pay a greater a proportion of the total tax bill. Tax avoidance declines and investment of that sheltered money increases. Those engaged within the black economy also become more ‘officially’ economically active. They start paying what they consider to be ‘fairer’ taxes. The same point about ‘fairness’ also applies to ‘better off’ people.

Another interesting side effect is that because revenues rise overall, taxes which do not have a particular economic role such as inheritance tax, can be swept away. A system can function perfectly well on a form of income tax and capital gains tax (incorporating national insurance within the overall operation) without an inheritance tax. Now that really would be a 'tax simplification.'

The idea of a flat-rate tax is now spreading from Eastern Europe gradually westwards. The reason for that is because countries introducing low flat rates suddenly become more competitive than their neighbours. Their neighbours have practically no choice but to join them. Should Poland and the Czech Republic join in, Germany might well follow. And at that point, it is fair to say that everybody will have to join in.

Currently, the absurdities of pre-owned assets rules ‘rent tax’ are exercising the minds of those engaged in private-client matters. This, in my opinion, represents the furthest natural point of the swing of the pendulum towards an impenetrable and thus very silly tax system. I suspect there will follow a much sharper swing in the other direction towards true tax simplification. This can only be good for the mental stability of advisers in any profession with anything to do with money. It would also mean that a huge army of people formerly committed to paper chasing in our over regulated environment, can be put to more socially productive use as with the aforesaid ex accountants, tax lawyers and bureaucrats. Perhaps there really is some light at the end of the tunnel? Retirement beckons early for some?

David Coldrick
Editor
david.coldrick@wrigleys.co.uk