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Institute of Directors backs abolition of corporation tax on undistributed profits

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Eight taxes would be abolished and replaced by a ‘single income tax’ under reforms proposed today by the 2020 Tax Commission, a joint project between the TaxPayers’ Alliance and the Institute of Directors.

The Commission has recommended that:

  • taxes should be cut to 33% of national income;
  • marginal tax rates should not exceed 30% and the personal allowance should rise to £10,000;
  • ‘taxes on capital and labour income disguised as business taxes’ should be abolished and replaced with a tax on distributed income;
  • transaction, wealth and inheritance taxes should be abolished;
  • other consumption taxes need to stay for now, but transport taxes should be cut; and
  • local authorities should raise half of their spending power from local taxes.

The proposal to limit the government’s share in the economy to a third was ‘far from mainstream’, the Financial Times reported. ‘The government at present raises about 38% of national income, while its spending share is about 46%.’

The Commission proposed the abolition of employees’ and employers’ NICs, corporation tax and capital gains tax, inheritance tax, stamp duties on shares and stamp duty land tax, and air passenger duty.

The Commission said numerous empirical studies showed that ‘higher rates of corporation tax lead to lower wages’.

‘Companies do not pay tax any more than buildings, toasters or cows do,’ it said. Shareholders and employees bear the cost of corporate taxes in the form of reduced dividends and remuneration, the authors argued: ‘Better to tax the actual beneficiaries of profits as and when they benefit.’

The tax would be levied at the corporate level, however, to minimise the burden of administration for HMRC and individual taxpayers and reduce the scope for evasion. Companies would pay tax on their total dividend and interest payments.

‘Tax may be a necessary evil – but it remains an evil’

The Commission noted in its summary that the full report considered the ethics of taxation from ‘a number of philosophical perspectives’ and included a number of essays. It quoted Eamonn Butler, Director of the Adam Smith Institute, as saying that ‘charitable giving ... is far more laudable, and far more superior morally, than support that is extracted from people by force’.

Butler wrote: ‘We hear the moral arguments against taxation much more rarely [than the arguments in favour]. Yet these unspoken arguments are surprisingly numerous, and surprisingly strong. Tax may be a necessary evil – but it remains an evil.’

Tax was coercive, eclipsed personal morality and raised the state over individuals, he argued: ‘The belief that our taxes might do some good is only a small part of the reason why we pay up. The main reason we pay our taxes is the threat of judicial force.’

The report concluded that tax evasion was ‘immoral as well as illegal’. In some cases, legal tax avoidance was ‘also immoral’, but governments had a responsibility to ‘minimise the opportunity to avoid taxes’.

It claimed that the existence of ‘low-tax jurisdictions’ reduced the ability of governments in other countries to ‘impose unjustly onerous taxes on their own populations’. Critics argue that such tax competition undermines the ability of elected governments to set their own levels of taxation.

Allister Heath, Chairman of the 2020 Tax Commission, is also the Editor of City AM. He said it was time for Britain to ‘make a vital choice between tweaking the status quo and letting our economy continue to be crippled by complex and punitive taxes, and drastically changing course with a radical but realistic plan for a tax system fit for the 21st century’.