Reality check: Fixing the UK’s tax system – reckless public spending increases of recent years have to be paid for.


Statistic of the Week: The average cost of raising a child until the age of 21 has risen in UK to £201,809. That total includes the cost of food, childcare [remembering that childcare by grandparents in UK is not tax-deductible], pocket-money [it is not clarified whose pocket-money?], driving lessons [for driving parents round the bend], a first car [paid for by the parent], and school trips, equipment and uniforms – but not private school fees and gifts given to friends, telephone bill costs, driving to school and shopping trips costs etc.

Reform Bulletin

Friday 5 March 2010

Reality check: Fixing the UK’s tax system

Today Reform publishes its latest report Reality check: Fixing the UK’s tax system which argues that the main political parties are right to propose policies to increase revenues in order to reduce the government deficit and to remind the electorate that the reckless public spending increases of recent years have to be paid for. The report is available at www.reform.co.uk.

Reality check

§         All three major parties are now committed to the most economically damaging tax rises – on income and employment – through the 50p income tax rate and the increase in National Insurance Contributions.

§         The Opposition has said that it cannot repeal the 50p rate and the NICs increase in the short-term because of the need to reduce the deficit.  That is not true because there is a much better candidate for increasing revenue – indirect taxation on consumption.  Eliminating the exemptions on VAT, with protection for the poorest third of households, would raise enough tax to help reduce the deficit while abolishing the 50p rate and cutting NICs below their current level.

§         A new set of principles is needed to give confidence and structure to the future of tax policy. Tax policy has descended into a kaleidoscope of conflicting and unpredictable initiatives.  The primary objective of tax policy should be to raise revenue to fund government activity at the minimum cost. The proposed Reform principles to underpin this objective are consistency, transparency, economic efficiency and fairness.

Recommendations

Do’s

§         Broaden the VAT base. All zero and reduced rates should be scrapped. Increasing revenue from VAT is preferable to increasing taxes on labour and to putting up the rate of VAT. The poorest households would be most affected – Reform proposes increasing cash benefits by 7.5 per cent so that the poorest three decile groups would be better off. Additional revenue of £15 billion would be raised.

§         Scrap the 50p income tax rate and reverse the restriction on higher rate relief. These measures are short-termist and politically motivated and will tip the balance of fairness in the tax system. They will result in high effective marginal tax rates, reducing incentives to increase work effort, and will make the UK a less attractive place for business and investment.  The freeze on the higher rate threshold should also be abandoned to avoid dragging an extra 70,000 people into the 40p bracket.  Reversing these policies would lose the Treasury up to £2.5 billion.

§         Reduce National Insurance Contributions. The Government’s planned increases in NICs will reduce incentives to participate in work or increase work effort. They will also increase the cost of employing workers at a time of high unemployment.  Reducing employee and employer NICs by 0.5 per cent while raising the primary threshold to £6,475 to align it with Reform’s proposed income tax zero rate band would be a tax cut of £8.2 billion, compared to the Government’s tax rise of £6.9 billion.

§         Replace personal allowances with a zero rate threshold. Personal allowances reduce taxable income and so provide higher benefits to higher rate taxpayers. A zero rate threshold would cap the benefit received to the basic rate for all taxpayers, meaning relief can be provided to basic rate payers in a more efficient and cost effective way. Including compensation for pensioners, this would raise additional revenue of £2.9 billion keeping the current threshold of £6,475.

§         Keep the bankers’ bonus tax as a one-off measure. This is unlikely to change the long-term “risky” activities of banks and along with other measures targeted at the rich – including the 50p rate, withdrawal of personal allowances over £100,000 and the non-doms changes – could be damaging in driving financial institutions and workers out of the UK.

§         Scrap gimmick income tax reliefs and employee benefits. The system of employee benefits is highly convoluted. Many of the reliefs are based on outdated working practices and are ad hoc, rather than consistent. Most of these benefits could be abolished at an estimated saving of around £1.1 billion.

Don’ts

§         Do not recognise marriage in the tax system. This will not achieve the objective of halting the decline in marriage in the UK and is also inconsistent with the direction of travel of tax systems across the world which are taking a more neutral approach. A transferrable tax allowance has been costed at between £600 million and £3.2 billion depending on the design and would be money poorly spent.

§         Do not introduce an early cut in the main rate of corporation tax. Surveys show that certainty and transparency is more important to businesses than low headline rates. The UK’s corporation tax rates are competitive compared to other large economies. It is estimated that a reduction in the main rate from 28p to 25p would cost £1.2 billion in 2011 and £2.5 billion annually thereafter. Stability rather than tax cuts should be the priority for corporation tax.

§         Do not introduce an early rise in the inheritance tax threshold. While inheritance tax thresholds should rise in line with asset prices, given the size of the budget deficit this should not be a priority for the next Parliament. It is estimated that increasing the threshold to £1 million would cost £3.1 million.

Debate

The report was launched yesterday at an event held at GE.  Anthony Browne, Policy Director for Economic Development at the GLA, said in recent years tax has been used as a “short-term political weapon”.  He called for a measure of “tax sanity” to be introduced to the system, particularly in relation to the bankers’ bonus tax and the 50p tax rate. Will Morris, Senior International Tax Counsel for GE, argued that the existing 28 per cent rate of corporate tax is “actually pretty competitive” and criticised Conservative proposals to lower the rate.  In response, Mark Hoban, Shadow Financial Secretary to the Treasury, said the Conservatives would resist “being seduced by the arguments of the losers” and would keep their policy of cutting the main corporation tax rate to 25p, funded by scrapping certain allowances and reliefs.

Media coverage

§         In a piece for The Daily Telegraph, Andrew Haldenby, Director of Reform, argues that despite the desirability of low taxes, tax cuts cannot be on the agenda.  Tax rises and increased efficiency in the public sector have to go hand in hand to improve the public finances.  Andrew suggests that “the right tax increases now can help secure our economic future”.

§         In a comment piece on Centreright, Lucy Parsons, Senior Economics Researcher at Reform, writes: “The reality is that the scale of the public finances crisis is so great that tax rises are inevitable whatever the outcome of the election.”  Lucy goes on to criticise current measures, such as the 50p income tax rate and the increase in National Insurance Contributions, arguing that broadening the VAT base will lead to a more efficient and fair tax system.

§         The report is also covered by The Daily Telegraph, FT, The Express, The Mirror, City AM and PA.  The report was also discussed on Radio 5 live this morning by Patrick Nolan, Reform’s Chief Economist, and Lucy Parsons, Senior Economics Researcher at Reform.

LUCY PARSONS

Senior Economics Researcher

REFORM

45 Great Peter Street

London

SW1P 3LT

Tel 020 3327 1182

Switch 020 7799 6699

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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Filed under Credible Electoral Governance, Credible Political Governance, disenchantedness and disconnectedness of the young voters in UK, disenfranchised, Electoral & Political justice for all, Emotional Intelligence - EQ, Global Credibility, Government Culpability, Government's Guile, Labour's pervasive & pernicious incompetence, Milton Keynes Community, Obama Effect

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