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Does tax need to be quite so taxing?

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Nobody likes paying tax, and it is understandable those paying 40 or 45 per cent of their salary to HMRC don’t like it being taken off them and given to others.

But we have progressive tax because as a society we have decided the tax system should, to an extent, be used to redistribute wealth. You might not like that, but all the talk of “fairness” and “those with the broadest shoulders” is to placate this tendency.

A similar principle underlies there being low or no regulatory fees for smaller firms.

Prime Minister David Cameron says he would “love” to increase the 40p income tax threshold. Earlier this week, Conservative policy wonk Oliver Letwin said a discussion “will no doubt open up” about a flat tax as public finances improve.

The Institute for Fiscal Studies reckons a flat tax would have to be set at 31 per cent to be cost neutral: surely a tricky sell (at least for the majority of the population) in what will effectively be an austerity election. No wonder Tory high command shot it down in flames.

While Labour says it is not returning to tax and spend, it has yet to come forward with details of what exactly it is going to do, though the idea of “pre-distribution” has been floated. Health Secretary Andy Burnham’s loose talk of a death tax to fund care was also reportedly slapped down by his party.

At the moment we essentially take money from the well off, spend a load of it on an inefficient state, which then distributes the remainder to the less well off. But what if we had an economy where redistribution wasn’t quite as necessary? 

What if Government, employees and business worked together to improve wages in exchange for tax cuts? What if, and bear with me here, we listened to the Green Party and introduced some kind of pay ratio so chief executives cannot pay their cleaners £11,484 a year (minimum wage) while they take home more than say 20 times that? It is for others cleverer than I to come up with the details.

But there must be a way that bosses could pay themselves what they want, but not at the expense of their staff, leaving the state to tax both to make up the difference. The status quo makes no sense.

Yes, a chief executive might have started the firm, and taken the risk. But this is the genesis of inequality tax seeks to address. The 45 per cent income tax goes to fund tax credits, childcare and all the rest of the things that cleaners can’t afford because of their low pay. If they were paid better we could cut taxes and reduce reliance on the state. 

This isn’t about a communist state. It is about getting the state out of our pockets. Either we can deal with the problem inefficiently after the event and keep a load of Whitehall mandarins in the manner to which they are accustomed and people reliant on benefits. Or we can deal with it at source, cut tax rates, reduce inequality and the size of the state. Who do you trust more? Yourself and your staff or the Treasury and DWP?

If left and right, staff (especially the unions), business and Government are willing to compromise there is a middle ground where people can be paid more and taxed less. Whether this is achievable is a different matter.

Steve Tolley is political reporter at Money Marketing

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