Goodbye, PAYE?
Posted by Christie Malry on February 20, 2010 at 10:35 am
The Times carries some useful tips today on how to check your tax code, the simply brilliant British invention that ensures that income from salaried employment is (usually) taxed at precisely the right amount. So I'm astonished to learn in the Telegraph via Guido that the Tories plan to axe the Pay-As-You-Earn system (PAYE) if they gain power.
Amazingly, PAYE dates from 1944, decades before computers. While it may be an imposition on employers, which probably explains why countries like the US don't have it, its huge benefit is that it liberates ordinary people with simple tax affairs from the need to file a tax return.
I don't see how a cashflow based taxation system will work.
Firstly, Britain is obsessed with having a progressive tax system; 'progressive' in this context means tax rates that go up as you earn more money. PAYE handles this by forcing the employer to do all the hard sums. If you get income from another source, they tell HMRC which then fixes it through either this year's or next year's tax code. How will the next pound you earn be taxed under the Conservative proposals?
Secondly, it's far from trivial to work out what a particular piece of income might be. Let's say I receive a Paypal payment from someone. Is it because I sold them something on eBay (possibly taxable at the marginal rate if it's a business, but not otherwise)? Is it a gift (not taxable)? While clever computing might help in some situations, it looks like another NHS supercomputer problem in the making. Times a million.
Thirdly, as Guido points out, there are serious privacy issues here. The State has the right to take you to court to force you to hand over money to it. That's not quite the same as allowing it instant access to your PIN so it can take your money when it likes.
Fourthly, this is simply bad politics. The Tories will be lifting a burden from companies, which cannot vote, and placing a heavy administrative burden on people, who more or less do. Lessons can be learned from the US. There, a quarter of a billion people have to navigate the fiendishly complex IRS rules and regulations to file their own personal tax return. Then they have to do exactly the same again in respect of their state taxes for every state they have worked in. It's insane.
Yes, there are faults in the system. But let's not underestimate how much PAYE has freed millions of ordinary people from tax filing drudgery. It doesn't deserve to be binned just yet.
Update: Clever Tim Worstall sees the upside - pressure for lower taxation.
Well, the US has just such a system. Introduced during WWII as here. Formulated by Milton Friedman and he called it his greatest mistake. By witholding tax from paycheques it enabled tax rates to be higher he thought.
My understanding was that the US system isn't true PAYE, though, in that the taxpayer elects for a certain number of 'deductions' which reduce the amount of tax payable during the year. But the taxpayer still needs to file a tax return at the end of the year to pay any net amount due or reclaim any overpayment. Theirs is more of a payments-on-account system.