Time for a tax rethink

Britain's tax and benefits system is a mess and is starving services such as education of essential funding, says Maurice Saatchi.

It is a stark fact of 21st-century life that government and citizen have something in common: both are short of money.

The government does not have enough of it for the best health service, schools and universities, while citizens do not have enough for a good pension, medical care in old age, university fees and such like. So they torture each other. Governments raise tax, so reducing individual incomes and creating more dependence on the state, while citizens claim more state benefits to compensate. And so it goes on until the government is claiming billions of pounds a year in taxes from citizens who also claim billions of pounds a year in benefits from the government.

Britain's tax and benefit system today needlessly transfers £30 billion each year - between 9 and 12 per cent of government spending - in and out of the very same households because of the overlap between taxpayers and recipients of benefits and pensions.

The result: almost half the households in Britain are means-tested for benefits; half the increase in government costs is for the administration of these benefits; and half the government's budget surplus this year arises from the non-claiming of those same benefits. At the same time, there is less money for public services such as education.

How much better for those households to retain a larger proportion of their earned income. Higher net incomes decrease the need for benefit payments. The motivation for millions of tax and benefit transfers would disappear.

The need for such a radical change is evident from examination of the system. Most people believe tax takes about 38 per cent of gross domestic product. But that is just net. The gross system collects a staggering 53 per cent of GDP. The citizen is then obliged to claim back 15 per cent of GDP, £150 billion, by navigating a mass of more than 250 complex tax allowances and reliefs.

One result is that a pensioner wishing to claim the government's minimum income guarantee has to complete a 40-page application. Out of 500,000 eligible pensioners, only 82,000 attempted the feat.

According to the latest House of Commons Library figures, the number of basic tax rates has more than doubled, from 15 to 38, under the present government. Tolley's Standard Tax Manual , the tax accountants' bible, has increased from 2,529 to 3,293 pages. The latest finance bill will take existing tax legislation to more than 6,000 pages.

The charm of such a complicated system for the government is the scope it allows for hidden tax increases via reduced allowances. People wake up one day and find themselves in a higher tax bracket, with tax as a percentage of GDP creeping up invisibly. This is why the government's tax revenues are rising three times faster than people's earnings.

In 2000, the tax burden reached £350 billion, equivalent to 38 per cent of GDP. On this calculation, people work for the government for the first five months of the year. So Independence Day - the day on which people stop working for the government and start working for themselves - fell on May 30.

When the present government was elected three years ago, Independence Day fell on May 25. This year, it will be June 10.

It is time for a war of independence, with the aim of moving Independence Day back to April 21, where it was in the 1950s, when tax was only 30 per cent of GDP.

Independence Day should be a benchmark symbol, so people will be able to assess whether we are going forwards or backwards. Independence Day should be a national holiday, a mark of progress towards the goal of greater independence for all.

In the 21st century people want independence, not dependence. They have the knowledge and the desire - but not the money.

A simpler system is needed whereby people are taxpayers or benefit recipients, but not both.

The result would be a more transparent, open system, comprehensible to all. The scope for stealth tax could be reduced and its effects neutralised. Savings in administration could be added to health and education spending.

The system should be revitalised and restructured for the benefit of all.

Maurice Saatchi is the Conservative Treasury spokesman in the House of Lords, a governor of the London School of Economics, director of the Centre for Policy Studies and author of The Science of Politics , published by Weidenfield & Nicolson, £9.99.