The general election campaign has yet again exposed the shaky grasp that our elected representatives have on the realities of our tax system.
Apart from the laughable figure work which indicated that our new policemen would be paid £8,000 per year from new taxes, the campaign has showed yet again that the economic effects of taxation are poorly understood in Parliament. Just like when a store raises prices, it will often see a drop in turnover, so when Government’s raises tax rates, taxation rates often drops off. The experience of Corporation Tax is that as the Corporation Tax rate has dropped so the Corporation Tax take has increased. In the tax year that just passed it leapt to £55 billion.
There were similar behavioural reactions to other changes in tax rates in the past. So the reduction of the top rate of tax to 45% did not lead to a material drop in tax receipts from the highest paid. The increase in the dividend tax rate lead to individuals paying themselves large dividends in 2015/16 before the new rates came in.
This was one of the reasons why the Government did better on its public borrowing target in this tax year when the dividend tax was paid than they will do in 2017/18 when it is predicted that the self-assessment yield will fall because less people paid themselves dividends after the tax rates went up.
If politicians have such a low understanding of the mechanics of tax, how are they equipped to make complex laws?
More urgently, as professionals can know be disciplined by their bodies which goes against the will of Parliament, there is a real issue because it may be very difficult to tell what that will is in the first place.
Primondell is running courses on the new regime for advisers including the professional code relating to taxation which now covers seven professional bodies.
Make sure that you do not end up on the wrong side of the line.
