UK FACES RISING TAX BURDEN DUE TO GOVERNMENT’S FAILURE TO REFORM THE PUBLIC SECTOR PENSION


WHERE HAVE YOU HEARD THIS BEFORE???
 

Prisons

 

§         The number of employees working for HM Prison Service in England and Wales (excluding private prisons) has increased since 1998 by 6,300, as the size of the prison estate grew by two-thirds.   But new ONS figures show that the greatest increase in staff was for managers, administrators and cleaning staff (classified under “Other grades”), increasing from 16,700 in 1998 to 21,900 in 2005. 

 

§         The total number of prison officers has barely risen since 1998, despite an increase of 20 per cent in the number of prisoners (rising from 65,000 in 1998 to almost 78,000 in November 2005).  An increased number of prisons would explain the growth in the prison governor grade.

 

 

TOTAL PRISON SERVICE PERSONNEL 1998-2005

 

England and Wales

1998

2005

Increase 1998-2005

Percentage increase 1998-2005

Prison officer

23,400

24,000

600

2.6 per cent

Governor

900

1,400

500

55.6 per cent

Other

16,700

21,900

5,200

31.1 per cent

Source: Public Sector Employment Trends 2005, ONS, 28 October 2005

 4. UK faces rising tax burden; US debates tax reform

 

§           Falling productivity in the public sector means that services need more resources just to stand still, let alone to improve.  It puts further upward pressure on taxes at a time when the tax burden is already rising to a 25 year-high by 2008-09. 

 

§         Another recent decision – the Government’s agreement not to increase the retirement age of existing public service workers to 65 – will also increase the tax burden in the long term.  With the reforms, the cost of public sector pensions would rise from 1.5 per cent of GDP now to 2.3 per cent of GDP in 30 years’ time.  Without the reforms, the cost will rise to 2.5 per cent of GDP. 

 

§           The difference amounts to 0.2 per cent of GDP, the equivalent of a tax increase today of almost 1p on the basic rate, costing the average taxpayer £150 a year.

 

 

COSTS OF THE FAILURE TO REFORM PUBLIC SECTOR PENSIONS

 

 

Percentage of GDP

Basic rate of income tax equivalent

Cost to taxpayer on average earnings of around £22,000

Current cost of public sector pensions

1.5 per cent

6p

£900

Cost of public sector pensions in 2033-34 –Government’s proposed plans for reform

2.3 per cent

9p

£1,350

Cost of public sector pensions in 2033-34 in absence of reform

2.5 per cent

10p

£1,500

Sources: Pensions: Challenges and Choices, Pensions Commission, October 2004; Long Term Public Finance Report, HMT, December 2004; Stephen Yeo, Senior Consultant, Watson Wyatt, quoted in The Economist on 23 March 2005

 

US DEBATES TAX SIMPLIFICATION AND REDUCTION IN TAXES ON DIVIDENDS AND SAVINGS

 

§         In contrast to rising taxes in Britain, the publication of the recommendations of the President’s Tax Reform Panel on Monday has ignited a vigorous debate in the US about how best to design a simple, pro-growth tax system. 

 

§         There has been widespread agreement in the US that the tax system is too complicated and distortionary and must be reformed.  On 7 January 2005, President Bush established the bipartisan Advisory Panel on Federal Tax Reform to recommend options for reform of the tax code.  The Panel’s recommendations were required to be revenue neutral and to retain some element of progressivity in the system, but also had to simplify the laws to reduce the cost of compliance as well as encouraging work and increased saving and investing. 

 

§         The Panel published two options for tax reform. 

 

      The Simplified Income Tax (SIT) Plan would dramatically simplify the tax code, remove targeted tax breaks, lower rates and abolish the Alternative Minimum Tax (AMT), which currently hits over 20 million taxpayers.  It would remove many of the disincentives to saving that exist in the current code and make small business tax calculations much easier.  It would preserve and extend, although simplify, major features of the current tax code, including benefits for home ownership, charitable giving, and health care.  It would also offer an updated corporate tax structure to make it easier for American corporations to compete in global markets.

 

      The second recommended option, the Growth and Investment Tax (GIT) Plan, would build on the Simplified Income Tax Plan and would add a major new feature: moving the tax code closer to a system that would not tax families or businesses on their savings or investments.  It would allow businesses to expense or write-off their investments immediately.  It would lower tax rates, and impose a single, low tax rate on dividends, interest, and capital gains.

 

§         In a leader on 3 November 2005, the Wall Street Journal Europe praised the proposals, noting that they will reduce the £135 billion a year of compliance costs and allow Americans to save almost four times as much tax-free as at present.  The leader also noted that capital gains and dividend taxes would be cut and that businesses would be able to expense all capital purchases, which would encourage investment. 

 

§         The paper, however, cautioned that income and corporate tax rates were left largely unchanged and would remain far higher than the two income tax rates of 15 per cent and 28 per cent after the 1986 tax reform.  It also noted that the Panel used “static” tax scoring, which fails to take into account the positive impact on growth and revenues from a more efficient tax code. 

 

§         In a Briefing note, Dan Mitchell of the Heritage Foundation concluded:

 

“The Panel’s recommendations all point in the right direction.  The only criticism is that the members of the Panel backed away from more sweeping reforms in an effort to cater to perceptions of political reality.  Instead, the Panel should have seized upon the opportunity to shift the perception of political reality.  Many nations have adopted sweeping reforms such as the flat tax precisely because policymakers sought to change the terms of debate.  Fortunately, the Panel’s analysis points the way toward even bolder changes.  Lawmakers should seize upon this Report and begin a discussion that will lead America to a more competitive system such as a simple and fair flat tax” (Grading the Tax Reform Panel’s Recommendations, The Heritage Foundation, 1 November 2005). 

 

  

Reform is an independent, non-party think tank whose mission is to set out a better way to deliver public services and economic prosperity.

 

Reform produces a daily e-mail media summary and weekly e-mail bulletins analysing the latest developments in public policy.  To receive either please sign up at www.reform.co.uk or e-mail anna.calvert@reform.co.uk.

 

ANNA CALVERT
Office Manager
REFORM
45 Great Peter Street
London
SW1P 3LT
 
Tel 020 7799 6699
Fax 020 7233 4446
Mobile 07736 285 957
www.reform.co.uk
 
Reform is an independent, non-party think tank whose mission is to set out a better way to deliver public services and economic prosperity.

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