At last – this Tax Commission has a practical way to fix the UK system
THE 2020 Tax Commission, and its final report out today, isn’t the first call for substantial reforms to create a more efficient tax system. We found 53 earlier reviews. But taxes are still dysfunctional, and the last substantial change for the better was Nigel Lawson’s 1988 Budget and its sharp cuts in marginal tax rates. So why has all that intellectual work failed to translate into better policy?
The reviews address a real problem. We have a tax code that is 11,520 pages long. No one really knows how much they are paying, and everyone suspects that everyone else isn’t paying their fair share. As our tax system loses legitimacy, we edge closer to the situation already seen in countries such as Greece. .
If you look at the numbers honestly, including employees’ and employers’ National Insurance contributions, marginal tax rates start at 40 per cent on low earners; rise to nearly 50 per cent for those paying at the higher rate from about £40,000; nearly 70 per cent for those earning £100,000 to £120,000 with their personal allowance withdrawn; fall back to 50 per cent; then rise to nearly 60 per cent for the additional rate from £150,000. Capital income gets taxed repeatedly by corporation tax, taxes on dividends and capital gains tax, among others.
Decades of economic research show that high marginal tax rates depress labour supply, investment and innovation. High taxes put people off working and investing in Britain. That means less growth and less of the growth in productivity that is critical to ease the enormous pressure currently being placed on living standards.
So if the need for tax reform is that pressing, why haven’t all those worthy reports made more progress?
Too often they make compromises with the bureaucracy, and its attachment to the status quo, and not with the public, who are worried they’ll end up paying more of the taxes they hate than they do now. Many reform proposals include new or higher taxes on property. There’s a reason that the UK – which raises more in property taxes than any other developed economy– only gets 4.2 per cent of GDP from them. People hate council tax like no other tax. In the US, property taxes cause more taxpayer rebellions than any other category.
There are two reasons. First, those taxes tend to be taken as a lump sum, instead of deducted from wages. Second, they aren’t attached to a stream of income that can be used to pay the tax. Someone can have a property but not enough income to pay an annual tax. Forcing people out of their homes is ugly. Even if they can pay, most are loss averse. Unless they spend their days in front of a trading terminal, they find it more unpleasant to lose £10 than to gain £90 instead of £100.
Other proposals are based on a big expansion in the VAT base, applying it to food, for example. It’s not hard to see why adding a fifth to the price of food is a non-starter. Even small moves in that direction in the Budget ended in headlines about caravan and pasty taxes. And as cutting income tax doesn’t do anything for the poorest, higher VAT results in higher poverty or a rise in benefit dependency.
The TaxPayers’ Alliance and the Institute of Directors think that this tax commission will be different. The 2020 Tax Commission – which was chaired by Morning Wire’s editor Allister Heath – demands more from the politicians and bureaucrats who would have to enact it. Merging income tax with both employees’ and employers’ National Insurance for a single tax on labour income. Merging the different taxes on capital, so you can have the same rate on labour and capital income – 30 per cent – but also one of the most competitive tax systems in the world. Cutting spending and the overall burden of tax, so that people are left with more money in their pockets. They’ll spend it better than government.
In return, it gives the public the tax system they want: a clear understanding that everyone always pays the same rate on the same income and, if they earn twice as much, they pay twice as much. And it gives them the tax cut they want and deserve.
Matthew Sinclair is director of the TaxPayers’ Alliance. The report is available at www.2020tax.org