Talking Tax: Reforming Our Convoluted Tax System is a Necessity

Co-founder of Whole Nation Conservatives Igraine Gray is a Conservative activist and former council candidate, writer, published author and rehabilitated rough sleeper. Prior to the 2024 General Election she was Policy Assistant to Sir Simon Clarke.

The UK tax code is over ten million words long (1). For the newer reader that is nine times the entirety of the Harry Potter book series, or the equivalent of nearly thirteen King James Authorised Bibles, for the traditionalists. It is the longest tax code in the world.

Think that sounds long-winded, convoluted and ridiculously complex? It is.

We have hundreds of different taxes, all applied and taken differently, and we’ve spent literally decades tinkering with them, rather than streamlining or removing them. Every chancellor since Nigel Lawson has added to it, rather than removed things or simplified it.

With every new tax, rule change, banding and relief, loopholes are created, administrative burden increases, and importantly understanding decreases. People spend their entire career dealing with the tax system and yet can still be wrongfooted. Morally, the tax system should be operating at the level where employees and employers can easily understand their respective positions, and this just is not currently the case. In a Which? survey of 1,269 members in November 2024, just under a third said they would be submitting a self-assessment tax return. They asked these people what they dislike most about filing. Almost a quarter said they don't understand the tax rules or questions asked on the form (2).

Economically, the complexity in the system causes tax changes to interact poorly with each other and produce cliff edge distortions and other real injustices. Tom Clougherty, then the Head of Tax at the Centre for Policy Studies told the Treasury Select Committee in 2023: ‘a family with full-time childcare for two children in London would be better off earning less than £100,000 than they would earning nearly £150,000. That is an extraordinary distortion in the tax system and one that could have been easily avoided’ (3). I concur. If we are to truly be the party of aspiration and hard work, then we cannot have a tax system where you are worse off for earning more. Progress must pay.

The House of Commons Treasury Committee’s Report on Tax Simplification in June 2023 concluded that the UK tax system is overcomplicated, presenting “an obstacle to economic dynamism” (3). Considering the UK’s economic challenges - whether it be our infrastructure deficit, ageing population, sluggish growth, regional and generational inequality - and our technological and environmental ambitions, particularly around AI and clean energy, the one thing we cannot afford is for our tax system to stifle the innovation and wealth creation of the private sector. Annual growth of 2.9 per cent a year will be needed over the next 50 years just to maintain the equivalent of today’s welfare state (4) without considering the catching up we already have to do.

But simplification needn’t be the sum total of our reforming ambitions, after all, like all state functions, it is a messenger. It sets a tone and encourages social change. Unfortunately, if every penny taken in tax sends a message, on what we value and where we are going, then we would all need to be a codebreaker at the level of Alan Turing to understand the message it is currently transmitting.

For example, in view of our changing demographics, and our high levels of family breakdown, reforming our tax system to support families is a no-brainer. Currently, taxing individuals rather than households leaves no room for families to set themselves up in a way that is suitable for them. In Family-Friendly Taxation, a report by the Centre for Policy Studies and the then Conservative Growth Group, they found that couples with the same overall income can end up paying dramatically different amounts of tax depending on how earnings are divided between them. A couple earning £60,000 with two children would pay over £7,000 more as a single-earner than if both adults earned £30,000 each (5). The British tax system is also much less kind to families than other comparable countries. At the average wage, a single-earner married couple with two children will pay more tax here than in France, Germany, or the US – and more than the OECD average (5). We have done nothing to significantly correct the course since then.

That is just one area of taxation. If we consider our ability to attract and keep taxpayers, key to the sustainability of our tax regime, we also perform poorly. The UK ranks 30th out of 38 OECD countries in the 2024 edition of the International Tax Competitiveness Index (6), a rank likely only to fall as we consider the Government’s direction of travel. In a globalised world, whether governments like it or not, we operate within an international market, especially on tax. We must be sure to get the balance right to maximise revenue and the retention of that revenue.

To build a tax system that simplifies, competes and has message discipline is a big piece of work. It will need to be done if we are to live up to the British dream.

The incumbent government is fond of a review or two to say the least, yet I see no zeal for reviewing our tax system. The Conservative Party should rediscover that zeal for itself, and show it is serious about setting up the conditions for the whole nation to thrive.

References

1. The Chancellor must make it his mission to simplify our crazy tax system (telegraph.co.uk)

2. 5 self-assessment myths debunked: tips for completing your tax return - Which? News

3. Tax Simplification - Treasury Committee (parliament.uk)

4. Justice for the Young - The Centre for Policy Studies (cps.org.uk)

5. Families unfairly penalised by British tax system, says new report - The Centre for Policy Studies (cps.org.uk)

6. International Tax Competitiveness Index 2024 | Tax Foundation