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Ruth Davidson MSP’s recent intervention on the need for a new approach to taxing tech giants as a means of protecting high streets and town centres touches on a much wider question: how do we make sure our tax system keeps up with a rapidly-changing economy?

There has been a realisation that government needs to become much more nimble and responsive in the digital age. But the way in which government generates its income has not achieved this.

Freedom of Information, the Open Government Licence, publishing swathes of government data and a broad aim for government’s day-to-day interactions with the public to be “digital by default” have helped make government more open and navigable to citizens. This is in stark contrast to Britain’s tax landscape, which has become an ever more sprawling and impenetrable web of different levies, rates and reliefs.

David Ulph, former Chief Economist at HM Revenue & Customs (HMRC), identifies tax complexity in two forms, ‘design’ and ‘operational’. Design complexity refers to the way in which policy is formed and legislation drafted. Operational complexity describes the day-to-day compliance burden on individual and institutional taxpayers.

The impact of complexity is tangible. The Exchequer currently misses out on £33 billion in annual revenue through error, evasion and avoidance. A significant portion of this ‘tax gap’ has been attributed to our labyrinthine tax structures which are difficult to comply with and ripe for exploitation.

Business taxation has now reached a point where, according to the British Chambers of Commerce, “companies now routinely cite tax administration and compliance, rather than regulation, as their biggest single source of administrative headaches”. This partly contributes to errors in payment totalling £13.7 billion per annum from small businesses alone.

In terms of avoidance and evasion, the Institute for Fiscal Studies (IFS) has previously argued that “complexity leaves room for dispute about the intention of the law as written, and for creative attempts to find arrangements that fall within the letter of the law, if not its spirit”. Unnecessary complexity in tax law can be highly regressive, only benefiting those who can afford the expensive legal and accounting advice necessary to take advantage of it.

There are a number of explanations for design tax complexity. First is that our tax code is the product of centuries of evolution and therefore lacks underpinning principles. Second is that the tax code is constantly being contorted in order to achieve several different and sometimes conflicting objectives all at once: raising revenue, redistributing income and encouraging or limiting the damage to growth and investment. Third, there is the impact of substantial tax change made over the last two decades, often in response to political rather than fiscal requirements. This is highlighted by the quadrupling in size of Tolley’s authoritative handbook from around 5,000 pages in 1997 to over 20,000 today. This is thought to be the longest of any country.

Disentangling the design of taxation is far easier said than done. The scale of the tax code is often defended on the grounds that a complex economy like Britain’s requires a tax system to match and that length is not the same as inefficiency. The Office of Tax Simplification (OTS), for example, concluded that that the amount of tax law is not the main measure of complexity and  “longer legislation can be clearer and easier to use”. The use of plainer English can mean lengthier legislation but has been found to be more accessible to non-tax professionals.

One mooted option is just to delete entire taxes, as was Nigel Lawson’s budgetary model. Organisations like the Taxpayers’ Alliance (TPA) have previously called for Inheritance Tax, Corporation Tax and Air Passenger Duty, among others, to be abolished as part of the ultimate simplification. This however, can quickly becomes a debate about low rather than clear taxes. Although connected, they are not synonymous.

There has been some good, but limited, work in recent years to begin a process of disentangling the design of tax. This includes the creation of the aforementioned OTS, a move away having two fiscal events per year, an aspiration for greater alignment of Income Tax and National Insurance, as well as HMRC’s Making Tax Digital project for VAT.

The overabundance of tax law and lack of strategy in the design of tax policy can be traced back to a root cause – the way we create taxes. Research lead by the Institute for Government (IfG) found that structural shortcomings in government and parliament are in part responsible for a politicised and messy approach to tax. Finance Bills are not scrutinised enough and budgets have been allowed to become exercises in ‘pulling rabbits from hats’ rather than the application of fiscal principles to plan for the long-term. The IfG recommends “the establishment of a small Budget Cabinet Committee” as well as greater scope for earlier expert challenge and evidence. Another potential change is the creation of a designated ‘Joint Parliamentary Select Committee on Taxation’ as was proposed by the Tax Reform Commission back in 2006.

In terms of operational simplification, the opportunities to make understanding and paying tax easier for the public are much more attainable in the short to medium-term. The best example of operational streamlining is Estonia’s world-leading digital approach where 95% of tax is payable online and Estonians are able to file their tax return in 3 minutes. Estonia’s experience also shows us that an efficient, digital approach to government can reduce opportunities for tax non-compliance and be a revenue positive step.

Although it is widely understood that “tax without design” is having a real impact on people’s day-to-day lives and the country’s economic prospects, not enough is being done to address the problem. We need new thinking and concerted effort to move towards a more considered and principled tax settlement which effectively incorporates technology and learns from best-practise from around the world.

Oscar Rocklin is a graduate intern at Bright Blue The views expressed in this article are those of the author, not necessarily those of Bright Blue.