Prem Sikka

Says at least one sensible thing in his 12 step program to reform the tax system.

9. Abolish ID Cards: The government\’s ID card scheme is a veritable bonanza for IT companies and consultants. Yet the need for the cards has not been established. It is doubtful that reliable and safe technology can be produced. The abolition of the ID cards project would save around £7bn.

The others range from misunderstood (he\’s talking about a development tax rather than land value taxation) to entirely lunatic (raising the NI cap: given that it is a "contribution" to insurance then has he grasped that those who pay more should get higher pensions?).

But there\’s one where he, perhaps inadvertently, has a very good idea indeed.

Adjust the capital gains tax rate: The government has reduced capital gains tax to 18%. In contrast, for 2008-2009 the proposed basic rate of income tax is 20%, and the marginal rate rises to 40% for taxable incomes over £36,000 per annum. Income is income whether it is raised from capitals gains, trade or salary and should be taxed in the same way. The current divide offers the well-off plenty of incentives to convert income to capital gains and pay taxes at a lower rate. There should be no difference between the taxation of income and capital gains. This has the potential raise over £1bn.

Well, I don\’t think it would raise more money but that\’s because he\’s not looking at the tax system in the whole. Taxing capital gains at the marginal income rates does make sense (as long as we ignore such things as greater Laffer Effects given greater mobility), but we would in fact want to create a properly level playing field. Investment in housing should pay the same tax rate as investment in art or a corporation. Which means that we only tax the profits of such once, as we do with the art or the property. And if we\’re taxing the dividends from the corporation as income (as we more or less do) and the captial gains at the same rate as income then corporation tax itself is double taxation.

So if we follow this plan we should abolish corporation tax: which is an exceedingly good idea indeed.

But that isn\’t, I think, quite what Prem meant.

2 thoughts on “Prem Sikka”

  1. Far better to leave corporation tax as it is (the second least-worst tax) and scrap higher rate tax on dividends and capital gains tax tax (and Stamp Duty, of course).

    Hong Kong (and Singapore) charge corporate and personal incomes to tax at the same (low) rate, and that is the end of that. There is no further tax on dividends – the company has already paid income tax on the shareholders’ profits.

  2. which is what Hong Kong did, didn’t it?

    They only taxed personal income and left companies to get on with it.

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