A Taxing System

Philip Booth in Financial World on the costs of collecting taxes

With the burden of government spending rising beyond 50% of national income, there has been less attention in recent months given to the growing cost of government regulation. Increased regulation reduces the underlying growth rate of the economy, reduces employment and carries a very real cost for consumers, employees and business owners. Indeed, attempts to reduce government expenditure – though both welcome and essential – may lead to greater regulatory burdens on businesses as the government slims its machines and imposes more costs on the private sector.

Unfortunately, the costs of regulation are difficult to calculate and estimates tend not to reveal how the regulatory burden disproportionately penalises small firms. However, in one area of regulation – the costs to businesses acting as unpaid tax collectors – there has been a generation of research, and a new study, published by the Institute of Economic Affairs, builds on that earlier work .

The results of this research are alarming. The UK has the longest tax code in the world – with the possible exception of India. The UK’s tax code is about five times the size of the German tax code. Furthermore, the UK is one of only three countries in the developed world where the costs of complying with tax regulation are not decreasing. Perhaps this is not surprising given that the average Finance Act in the UK today is three times its length in the 1980s. However, in 40 other developed countries, the tax system is being simplified or, at the very least, governments are harnessing new technologies to reduce costs to businesses.

Perhaps the most disturbing aspect of the costs of red tape imposed on businesses by government is how unevenly they are spread. The IEA’s authors – leading academics at Manchester Business School – estimate the total cost to businesses of paying taxes to be between £15bn and £20bn. However, relative to turnover, the cost bears 16 times more heavily on the smallest businesses than on the largest. Tax regulation – like all regulation – is an impediment to the self employed expanding to take on more staff and ultimately acts as an impediment to competition.

Can anything be done? Given the progress that other countries are making towards reducing the costs to businesses of collecting taxes, the answer has to be “yes”. Regulatory costs could probably be reduced by about £5bn just by copying best practice elsewhere. And many of the proposed actions to reduce the administrative burden of taxes also generally make good economic sense in other respects.

For example, a large number of corporation tax allowance