If we really want to pay no tax, we should go to a place where there is no infrastructure, no road system, no police service, no education or health service and no sewerage.
Oh, so we quite like having running water, a proper sewerage system, schools, police and a road network?
Well now that we have established that you quite like the benefits of civilisation, we must find a way to make the system work.
I am more than aware of the current Modern Monetary Theory, where money supply is not limited by the gold standard or indeed by any other factor. However, even under Modern Monetary Theory, tax plays a role. Or should I say the civilisation charge plays a role?
Whilst it is tempting to start with a completely clean sheet moving to an independent Scotland, the best way to make successful change is incrementally. There are various things we could do quite easily, which would probably not make an immediate difference, but would sow the seeds for a more stable, equal, and prosperous country in the future. Even under devolution, it has been possible to reform stamp duty into a progressive tax, falling harder upon the rich than the poor.
As Adam Smith once said,
“It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in proportion.”
Nearly 300 years ago, Smith, who is considered to be the “Father of Economics” and a key figure in the Scottish Enlightenment, was advocating progressive taxation. Or a progressive contribution to civilisation.
Tax relief as a first main area for change
However, there are two main areas in which I believe considerable benefit could be derived with relatively little administrative difficulty. The first is in tax relief for new-start businesses and the second is the way in which VAT is levied. Currently if a UK taxpayer invests in a qualifying new business, they can claim the tax relief from HM Revenue and Customs. So, if, for example, a UK taxpayer invests £10,000 in a qualifying business, the HMRC will provide tax relief on the investment. And when the taxpayer comes to sell those shares, any gain is not taxable. The only condition is that the investment is held for a minimum of three years.
Anybody who has set up a business will know that three years is nothing; most tax relief schemes have a much longer minimum investment period. It is my contention that the minimum period should be 10 years, and that this very generous tax relief should only be available for businesses in less favoured areas, not thriving city centres. This is already the case for similar relief in the United States.
This change might result in a slight reduction in participation in the Enterprise Investment Scheme (EIS), but this would be more than compensated for by greater stability in new start businesses. Investors selling after three years often find the most willing buyer is a competitor, so the new business immediately loses its independence. By obliging investment for a minimum of 10 years, the new business is in a much better position to stave off unwanted takeovers or mergers. The basic principle of the legislation remains unchanged; all that would need to be changed is a couple of numbers, and the effect would be almost immediate. Easy to do, and good for new businesses.
VAT as a second main area to look at
The second field that would merit examination is VAT. All businesses charge VAT on their invoices, but businesses may also subtract the VAT that they have paid from the VAT that they are due. The effect of this is that the only party actually paying full VAT is the end consumer – you and me. As a tax on sales, it is inherently regressive; poor people pay exactly the same VAT as rich people, but it represents a much higher proportion of their income. That’s not what Adam Smith was advocating.
By simply changing the mechanism whereby VAT returns are submitted, a considerable reduction in the rate of VAT could be achieved. If companies were not permitted to subtract VAT they had paid from the VAT return, all businesses would pay VAT as well as all members of the general public. As the effective charge points for VAT would multiply considerably, the actual rate charged could be reduced very considerably; perhaps to 3%.
The effect on the businesses concerned would be negligible; 3% is not a lot of money. However, the effect on the general public would be an immediate reduction in the price of goods of up to 17%. Undoubtedly some businesses would raise their prices slightly, but the overall effect would nevertheless be to reduce the regression of VAT and increase its effectiveness. Businesses currently spend a lot of time and money looking at ways to reclaim VAT. If it is not possible, then there is no point in looking, thus saving time and effort. Like the previous measure, implementation would be simplicity itself. The VAT return is already being completed; the only difference would be that the full amount would be payable, with no discounts for VAT paid out.
These two proposals could join a list of revenue-neutral adjustments that a Department of Civilisation in Scotland could implement virtually overnight and could be expected to produce favourable results almost immediately, without producing any negative fiscal impact.