It sounds odd doesn’t it, pay less tax and yet increase the overall amount of tax collected. Well this concept is well known in economics and is known as the “trickle-down effect”. The idea is that economic policies that help the wealthy then trickle down to everyone else. As business is the only real driver of the economy, because this actually creates employment that generates growth, helps business and you help everyone.
By reducing taxes for business and the people who run them everyone else in the economy benefits indirectly. The reason is the extra income not spent on taxes is used to invest in the business through increased employment or capital spending. New workers mean new wages to spend money in the economy and also pay more taxes. Also additional savings can then be used by banks for additional lending. All of this goes to increase economic growth.
In January HMRC issued a consultative document aiming to increase their powers to collect tax from the very people who create the growth. This is counterproductive for a number of reasons
- As I have noted above, such people can then use the money to invest and thus create more growth. Even if they spend the money on their own consumption the money still gets spent thus growing the economy. The trickle-down effect means the increased growth ultimately leads to higher tax take.
- Higher taxes demotivates by removing the point of working hard. People either work less or move to a jurisdiction where taxes are lower and they get to keep more of the money they earn. Either way the country or the exchequer loses out.
- Higher taxes push tax avoidance, which is legal, towards tax evasion which is illegal. Our tax system now works on self-assessment. The tax payer tells HMRC how much tax they owe and they dutifully pay it on the due date. If the system is deemed to be unfair the goodwill required to make the system work will break down. Have you ever wondered why it is so difficult to pay for anything other than in cash in Italy?
- The consultative document actually goes further in that HMRC would like to make themselves judges in their own courts, thus diluting the taxpayer’s right of appeal and allowing HMRC to be both judge and jury. Personally I cannot see this draft getting through to legislation but it is outrageous that they should even consider it reasonable to propose such a solution
We will be writing to our local MP about HMRC’s consultation and it will no doubt be touched on in future blogs. In spite of all of HMRC’s efforts there is still a good deal of legitimate tax avoidance planning
available. If you wish to know more about paying less tax we can help.
Chartered Accountant, Solihull