Sunday, March 22, 2009

Economic Meltdown & 45p Tax

I have long said that the single biggest opportunity afforded by this crisis is a total reform of the tax system. Having snapped the Treasuries fiscal rules to match sticks, and opened the borrowing floodgates, Brown could have used the opportunity of temporary fiscal recklessness to at least upturn the whole structure of the tax and even welfare systems and leave a lasting legacy of a reformed and vastly improved structure.

Reading this morning an interesting piece by the ASI on the cost of minimal government it set me thinking.

Using, I worked out that the annual budget for 'defence' and 'protection', the categories which more or less correspond to those 'core duties' of government mentioned above, is about £70bn. Interestingly, that's about how much VAT set at the minimum rate of 15 percent should raise. Wouldn't it be nice if that was the only tax you paid?

OK, so maybe that's not realistic. But here's a still-radical proposal with a little more relevance to the real world: first, go ahead and restrict the Westminster Parliament to those core functions, and that limited tax base.

Then replace the welfare state with the kind of compulsory savings system that they have in Singapore and Chile, and which the ASI advocated in our reports on the 'Fortune Account'. Essentially, national insurance contributions, rather than going to the government, would go into personal, privately-owned accounts, consisting of health savings, health insurance, unemployment insurance, and a retirement fund.

Sexy stuff huh? Ok, so it's just sado libertarians like me who get excited by such things, but think about what it means.

What is being proposed is the decoupling of the business of government and the broad area which can be called 'welfare' or 'redistribution'. To do this would be to fundamentally alter the political landscape, since governments could no longer shuffle money around and disguise transfers, but would have to explicitly propose changes in taxation for the two categories of government activity. The two categories broadly resembling the traditional role of government (that which libertarians would support) and that which modern governments have adopted (that which libertarians would not support).

I proposed something similar a while back over at Curious Snippets...

Every newborn child should have a 'personal welfare' fund opened, in to which the government should pay, say, £5,000 each year until the child reaches 18. The fund should be private, like a pension fund, and thus invested, not a state operated fund financed from present tax receipts. The fund would accumulate £90k in static terms and should provide well over £100k (rough calcs anybody?) after investment returns on maturity.

This fund should be the only handout from the state, ever, to citizens. No more child benefit, no more unemployment benefit, housing benefit, tax credits, etc etc. The fund can be used the the individual as they see fit. They could spend it all on booze and fags, but then they would receive no more help from the state and would rely on any private charity. People could spend it on buying a house, financing their University degree, buying a car, wedding, paying for kids etc. People could top up the fund through their working life, and the fund would act like a buffer against the volatile nature of life. If you found yourself unemployed you draw on the fund, if you get sick or disabled you draw on the fund etc


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