Technology and tax calculations

A lot of suggestions to change tax calculations are intended to make it “simpler,” by which is meant to reduce the number of tax bands. Indeed some people even want there to be just one band – flat taxers. This is a terrible idea for lots of reasons, but the advantage of “simplifying” tax rates is in fact disappearing as time goes on.

It really is a bizarre idea to want to restrict the choice of tax rate to one option rather than utilise many. Arbitrarily limiting the tax calculation in this way leaves very difficult choices and makes it very difficult to achieve all that you want with the tax system. If you want to raise a lot of revenue you have to impose significant taxes on middle earners in order to get revenue from high earners.

Progressive and effective taxation is very difficult to achieve with the flat tax, which is often what the supporters of the single rate restriction really want to achieve. This would be a different argument about justice and the tax system, which I have discussed elsewhere.

The only sensible complaint against more complex rate structures is that people will not know what the tax implications will be for the economic choices that they are considering. If this complexity leads people to make the wrong decisions for them then it would adversely affect them, and in many cases for the rest of society as well.

The increasing availability and power of technology really makes this argument for simplifying tax rates disappear almost entirely. The computer in everyone’s mobile can perform the ‘complex’ calculations of tax implications in nanoseconds.

In a previous blog I mentioned that people should in the near future be able to log into an account with the tax authority and access data on their tax account. They could also integrate this with other programmes, but it would be useful if the tax authority could provide a service. This could predict future taxes based on scenarios entered by the taxpayer.

Tax calculations can be as complex and clever as we want them to be, and people will still be able to find out whatever they need to know about what their future liabilities. People can use their personalised tax website to work out their likely future tax rate and therefore net income.

For this reason the ostensibly more complicated tax calculations I propose in Rethinking Taxation—which utilise a smooth curve rather than discrete bands—are perfectly viable and fair. You can apply real-time lifetime averaging calculations without too much difficulty. I also suggest combining numerous tax bases into one comprehensive tax base and to calculate tax on that—people can plug in their expected income from all these sources and find out their future net income.

Indeed, there are reasons to think that people would find it easy to guesstimate their future liability with my lifetime proposal; people’s tax rates should quickly stabilise and people would come to know roughly what percentage of their future gross income they will receive net.

In conclusion, there is no need to worry about the complexity of tax rates in the digital age. This destroys the only argument for flat taxes or reducing the number of bands. Our technology also opens up the possibility of much more complex methods of tax calculation such as my own hourly averaging proposal. This means we can in fact have it all: highly progressive tax calculations that encourage economic activity. 

Technology and Information Sharing

The title of my book makes the bold claim that I have rethought taxation. Indeed, when I was first starting to develop the ideas behind my hourly averaging proposal around ten years ago I made some big assumptions about what would be possible.

Nevertheless, I find it reassuring that some of the technological innovations I assumed would be required to run my proposed system are now being discussed and even implemented.

The first important piece of technology that makes hourly averaging or the CLIPH-rate tax viable is one of these proposals already in the pipeline; that taxpayers should be able to log into a secure site to exchange information with the tax authorities. Just such a system was announced a few weeks ago in the UK.

The immediate advantage of this is that it means that people would not be required to do an annual tax return. Instead taxpayers could update the tax authority throughout the year, even downloading information from their accounting software.

Perhaps in the future people could transfer information from their online banking, or it could even be transferred automatically from various types of organisation and institution. For example – the Driver and Vehicle Licencing Agency could link each vehicle to its owner’s tax account to enable updated information about the vehicle and organise the payment of fees and charges.

Essentially, people can inform the tax authority of important pieces of information at their own convenience and ensure that their tax affairs are current and in order.

Replacing the annual self-assessment ritual with continual updating (or replacing it with a different one in which people declare that all the information given in the last 12 months is correct) opens up further possibilities.

A crucial aspect of my CLIPH-rate tax is indicated by the ‘L’ in the acronym: Lifetime. With a lifetime averaging system the aim is to treat each further piece of information or payment as if it is the last tax payment. Real Time taxation is also being introduced in the UK, as I will discuss in my next blog on this topic.

Taxation and technological development

One of the contentions in my book is that recent technological developments enable us to rethink taxation and what it can do.

Entrepreneurs develop technology that changes the economy and people’s lives in order to make profit. Tax system innovators aren’t going to make a fortune from it (sadly for me) but there is no less scope for revolutions in taxation as in other areas of life.

I suggest there are at least four areas where technology can be utilised, where each can be developed from the previous one:

1.       A secure website that enables accurate and real-time interaction between the taxpayer and the tax authority.

2.       Tax calculations can be cleverer, without making them overly obscure.

3.        Integrating the taxation and financial systems can mean tax is withheld as soon and accurately as possible.

4.       The greater use of electronic financial interactions and the above tax developments would make it harder for people to engage in fraud and criminal activities. Furthermore, IT developments can assist in fraud detection by flagging up those whose circumstances are more suspicious, enabling more targeted investigations.

In my subsequent blogs I will be outlining how the CLIPH-rate tax can utilise these advances.