Apparently today is Tax Freedom Day or, the day on which we start to work for ourselves rather than the state. Unless you work in the state sector, I suppose. I have always thought that the concept of Tax Freedom Day is a bit odd. Who pays all their tax off at 100% of income for the first five twelfths of the year? Is the premise that almost any level of taxation is too high? One of the early versions of the US constitution didn't allow the federal government to raise taxes. We don't hear too much about that these days...
What we can all discuss until the cows come home is the appropriate level and structure of taxation, to maximise economic opportunities and give the government money to spend on important things and nice things.
Are we moving away from taxes on income and towards taxes on consumption? Maybe. One of the possible results of the coalition's pension reforms may be that as we as individuals approach or go beyond retirement age, we may be able to use our pension pots as a very tax efficient current account. Money going in to a pension pot, such as a SIPP, has (up to a point) already-deducted income tax refunded into it. Money taken out of a pension pot has tax deducted from it at a rate depending on one's age and other factors. That means that if you are a net saver (as we all should be when we are working!) you can build up an investment fund quite efficiently. If you are my age, that means pretty much a one-way passage from income to capital, because taking the money back out is expensive. If you are much older, you can put the money in, get the tax refund, and they take money out again at your marginal rate of income tax. The pension system basically encourages you to defer spending which is, after all, the whole point.
If we extended the pension freedoms to people of all ages, we would effectively have a consumption tax: you would only ever pay "income tax" on money that you took out to spend; if you are good at saving, you could slash the amount of tax you pay.
In the States, they have a system called a 401(k), which, as I understand it, offers a similar structure to the UK system, but with more freedom and flexibility. Banks will lend to someone on the basis of money saved into his or her pension pot. So, for example, you can borrow against your retirement income. Americans have a much broader choice of how to invest their pension pot. One thing you are not allowed to do with your 401(k) is to invest in stuff which you benefit from, such as a second home. So you are allowed to invest in what we call buy-to-let, but you aren't allowed to buy a holiday home in Cornwall. I don't know what happens if you buy a buy-to-let and then live in it at a later stage, I imagine that may get quite complicated...
The point is that, with not too much tweaking of the pension savings system (such as removing the contribution limits and age limits), we could effectively move to a situation in which what is taxed is consumption, rather than income. That ought to do wonders for our long-term economic health.
It could also be a tax simplification: VAT (which is sometimes described as "the worst tax") could be abolished, freeing up millions of person hours in business administration (hello productivity); the "income tax" and "national insurance" regimes could be flattened out and simplified (goodbye thousands of tax accountants); capital gains, inheritance, and corporation taxes would be obsolete. The cack-handed auto-enrolment pension scheme would be unnecessary. Loads of the little tricks and gimmicks and micro-management of contemporary government could melt away (ahh).
None of this should be understood to be financial advice. The Capitalists are not Advisors.