Book review: What Everyone Needs To Know About Tax: An introduction to the UK tax system

Taxes are something pretty much everyone pays, but hardly anyone, apart from tax experts (and HMRC inspectors) really knows very much about. Tax commentator Gerry Brown says this book could help to change all that…

This is quite a short book (just 168 pages), but one which is packed with insightful observations and comment.

The author, James Hannam (pictured above), has worked as a tax adviser for over 20 years, in both large legal practices and large accountancy practices.
Hannam sets out his stall at the beginning of his book as follows.

“The UK tax system is so unfeasibly complex, so Byzantine in its intricacy and changes so quickly, that even the simplest rules can have a dozen exceptions,” he writes.

“In short, the purpose of this book is to help you become a more knowledgeable taxpayer and voter, not to save you money.”

With respect to those green taxes, Hannam comments, “These levies are not so much stealth taxes as taxes in deep cover, with false names and plausible deniability.”

Hannam sets out three Golden Rules about tax.

The First Golden Rule: Lots of small taxes together add up to make big tax bills.

The Second Golden Rule: No matter whose name is on the bill, all taxes are ultimately suffered by human beings.

The Third Golden Rule: Taxes are kept as invisible as possible.

A combination of the first and third of these rules comes close to matching the famous dictum of Jean Baptiste Colbert, Finance Minister to Louis XIV: “The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.”

A current HM Revenue & Customs “pet” project, Making Tax Digital, is a fine example of the third rule. By 2020, the annual self-assessment tax return will be abolished for the vast majority of UK taxpayers, and tax on most investment income will be collected through the PAYE system. Most taxpayers won’t appreciate what is happening.

The ‘Laffer Curve’

Hannam explores and explains some well-known tax issues. The Laffer Curve, for example, popularlised during the Ronald Reagan presidency in the 1980s, is fine in theory, according to Hannam, but no one has yet been able to identify the point on the curve which maximises government income.

He also looks at international tax avoidance and “transfer pricing”, which he believes is “the single most important issue in the world of international tax.”

In his examination of the tax avoidance issue, he scrutinises in particular for us the recent history of tax incentives for the film industry.

Hannam ends by putting forward five ideas for tax reform:

*  Stop cutting income tax, and start cutting national insurance
Cutting income tax benefits everyone, including the wealthy who can live off savings. National insurance is paid only by those in work so cutting it would enable poorer workers to keep more of their pay and help them escape the poverty trap. No advantage to those who don’t work.

*  Start the 45% tax rate at £100,000 instead of £150,000
Currently the marginal rate of tax increases from 40% to 60% at £100,000, and then drops back to 40% only to increase again at £150,000. But high marginal rates, Hannam argues, are economically damaging. Increase the rate to 45% for income of £100,000 and over, he urges, and eliminate the 60% rate.

*  Tax companies according to their accounting profits
Companies should be taxed on their accounting profits rather than adjusted taxable profits. This would, of course, put many tax specialists out of work.

Hannam also calls for the many tax incentives available to companies to be abolished, as there is little evidence that they impact corporate behaviour.

*   Expand the scope of VAT
Hannam points out that there is no economic sense in having a 0% VAT rate on books and children’s clothes, but appreciates that no Chancellor would make the change. He suggests extending VAT to cover all processed foods. Such an approach would raise money and help us eat more healthily, he argues.

*  Introduce a minimum income tax rate for the wealthy, while abolishing most income tax anti-avoidance rules and incentives
Hannam argues that the wealthy don’t have to work, and thus don’t have to pay national insurance. He suggests a minimum income tax rate of 30% on gross income and capital gains. This would be applied before any “special tax incentives”, and allowances for losses.

The bottom line

In his introduction, Hannam, as mentioned, defined the purpose of his book as being “…to help you become a more knowledgeable taxpayer and voter, not to save you money”.

Does Hannam achieve this objective?

Yes … and in an easily readable and informative way.

Who should read this book? The answer is right there in the title…

What Everyone Needs to Know about Tax:
An Introduction to the UK Tax System
by James Hannam
Wiley; 168pp
UK RRP £19.99
ISBN-13: 978-1-119-37578-4 [paperback]
ISBN-13: 978-1-119-37580-7 [PDF ebook]
ISBN-13: 978-1-119-37581-4 [ePub ebook]

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