Income tax on earned income is only honestly paid by those under the Pay as You Earn scheme. Even if they deign to make a tax return, the self-employed can, at worst, reduce their liability very substantially or make it vanish altogether. Of course, many of those not under PAYE do not declare at all. Moreover, many employers collect income tax and national insurance and fail to pay it to the Inland Revenue. Add in the fact that those in control of limited companies - the directors - are able to legally avoid the full burden of PAYE by devices such as share options and national insurance by receiving massive benefits in kind (which do not attract national insurance) and illegally evade by not recording money received on the books, and you should begin to get the unsavoury picture. The rich of course need pay no tax because they can put their capital and income beyond the Tax man in any number of ways, for example off-shore in the manner of Geoffrey Robinson.

Because income tax is only paid in full by those under PAYE, it is far from being a means of redistributing wealth according to income. Rather, it is simply a means of shearing the least mobile taxable sheep.

But the question of whether income tax should continue is not simply a matter of justice. As most of the tax is collected from those under PAYE, it becomes less effective the fewer large employers there are. This is because large employers are generally (1) willing to pay over tax and NI and (2) cheap for the Inland Revenue to administer. The number of large employers is rapidly diminishing. This both increases the cost of tax collection and the frequency of evasion by small companies who can easily evade tax.

How do small companies avoid tax? A favourite trick is to trade for a year or eighteen months without paying over tax of any kind to the state and then liquidate voluntarily. (Creditors other than the state are paid to ensure the continuance of the business under the next company.) A new company is set up on the same day as the other one is liquidated and the business continues as before. So, for example, AB Fashions Ltd liquidates on the 15th March and AB Fashions (New) Ltd begins trading on the same day. A separate company holds any assets such as machinery, so there is nothing for the liquidator to realise. The taxpayer makes up the non-remitted National Insurance payments from the liquidated company by crediting them to the ex-employees. Thus the taxpayer meets the cost of what is essentially theft by the employer. The employers get away with it because non-payment of tax or NI to the Inland Revenue - as opposed to non-declaration or non-deduction - is a civil not a criminal matter. In short, tax an NI deducted from wages but not paid to the Revenue is simply a debt to the Revenue.

This trick, incredibly, can be done almost ad infinitum because the legal restraints, such as banning people from being company directors, are utterly insufficient to stop the practice. Indeed, if a man wishes to engage in criminal activity with little chance of prosecution, he cannot do better than set up a limited company and trade fraudulently. As long as no blatant removal of assets and money occurs, prosecution can normally be avoided provided the principals of the company keep reciting such time honoured phrases "I thought trade would improve" and "I was out of my depth". If all else fails, lose the records or claim that they were never kept.

There is also a general reason why income tax should be abolished. It allows the most general means for the state to probe into the lives of individuals.

There is a simple answer to the unfairness of income tax and the growing inability to identify PAYE payers: abolish it and substitute a national insurance system, operated on a proper actuarial basis, to cover health and unemployment. Those unable to pay premiums would have to be given credits by the state.

Pensions are more problematical because of the period over which contributions must be made - anyone who believes that a pension can be guaranteed over a period of 40 odd years is living in cloud cuckoo land. Even if payments towards a non-state pension were made compulsory, it is all too easy to see situations where large numbers of people would be left with pensions insufficient to keep body or soul together or no pensions at all - remember Maxwell. Therefore, I cannot foresee a time when the state should not be the provider of the last resort. Such pensions need to be funded out of general taxation. I think that is the best balance one can get between freedom and the compassionate treatment of others.

To keep costs under control, the new system should be restricted to British citizens.