IT has fundamentally changed how we work and spend our spare time. Recent and future developments can do the same for the tax system, argues Douglas Bamford.
The ideal tax system would tax economic good fortune, subsidise those with poor fortune and improve economic incentives. These aims tend to conflict with one another, but I believe three recent developments in information technology create unprecedented opportunities to revolutionise our tax and benefits system and improve resource distribution.
The first development is the increasing data processing power available, which the UK’s HMRC is using to perform real-time tax calculations. Secondly, there is the increasing ability of people to interact with tax and benefit authorities online and share information. Thirdly, cash is gradually being replaced by electronic money transfers.
We are familiar with property registers such as the DVLA, for vehicles, and the Land Registry, for land and buildings. Similar registers could be created for other types of valuable property like financial products, shares, bonds, jewellery and artworks. These registers could then be linked to the tax system so that the authorities know who owns what. This would enable capital gains to be calculated almost automatically.
Making more use of this information, along with big data and other information sources on individual taxpayers and employers, would provide a more reliable idea of economic activity and people’s true incomes. Records of actual purchases could be compared to declared income to identify possible criminals. Al Capone was famously convicted of tax fraud rather than gangsterism.
Taxpayers’ income could be withheld when it arrives in bank accounts, instead of primarily using employers to withhold tax. Financial institutions would inform the tax authority of all incoming transfers to taxpayers’ accounts. The tax authority’s systems would calculate how much tax should be paid at that time, informing the institution how much money to send to them and how much to the taxpayer. This would be a much more accurate and reliable way to monitor income given that people are now less likely to receive income in cash. The onus would be on taxpayers to provide tax authorities with information on incoming finances to avoid it being taxed. This would give tax authorities a more accurate picture of people’s true economic activities.
The tax system could be used to pay earnings subsidies, such as tax credits. This way, when the tax authority is informed of an incoming amount of money into a taxpayer’s account, it could provide an additional amount – paying a negative income tax rate or tax credit. If the tax authority is obtaining a more reliable idea of people’s total income and can easily make payments, the benefits paid will be more accurate and timely.
My suggestions involve changing the tax base to a real-time comprehensive income one. People would be asked to pay tax on a progressive basis on their income, whether it comes from gifts, labour, investment returns, or whatever else. This would provide a much better idea of the relative economic fortune of the taxpayer—people who are fortunate in many dimensions can be asked to pay a higher tax rate without impacting upon those who are only fortunate in one dimension.
The method of calculating tax could be expanded so that it would encompass the income that people obtain across their lifetime, rather than on discrete transactions or annual amounts. Multiple-year tax calculations have long been proposed. Technology now makes this much more convenient for taxpayers and tax authorities than ever before. A lifetime perspective gives a much better idea of how fortunate someone is. A more progressive system of taxation (and more generous earnings subsidies) could be applied without the risk that it is middle income earners who benefit.
A lifetime approach would avoid otherwise arbitrary annual thresholds which can alter the way people organise their affairs. Taxing individuals across their entire lives would also avoid unintended effects of taxing all forms of income; people who received one big windfall would not be taxed more than those who received a series of smaller windfalls.
My most radical proposal is to take account of the number of hours that people work. Employers could report this information to the tax authority, which could use hours worked (hour credits) as the denominator in the lifetime calculation described above. This way, people who work longer for the same total income would pay less tax. People who get money more easily than others would pay more tax and people who struggle to get money would be able to get their income subsidised for each hour they work, giving everyone an incentive to work longer. Technology makes it easier for employers to share this information and for the tax authority to determine which employers are making more suspicious claims and investigate accordingly.
Lifetime hours would provide a much better idea of who is more economically fortunate. Those who work long hours over their lifetime without obtaining much income are clearly keen to earn, but not doing so well. Meanwhile those who receive significant funds without having to work long hours are by definition very economically fortunate. Hourly averaging can tax/support people accordingly, yet everyone will have an incentive to keep working to obtain more hour credits.
Making these changes to the tax system would create a much fairer distribution of resources in society, removing many of the disincentives to work produced by existing taxes and benefits arrangements.
