In today’s Times, David Laws, Liberal Democrat MP for Yeovil and former Chief Secretary to the Treasury , argues that the coalition must live with increased taxes on the rich as part of its deficit-reduction programme, but that reforming Britain’s complex and unfair tax system must be undertaken in earnest. Here’s an excerpt:
Under the last Labour Government tax policy was characterised, in the words of the Institute for Fiscal Studies, by “drift, punctuated by poorly thought-out changes”. A 10p in the pound rate of income tax was introduced and abolished. National insurance changes were made for political, not economic, reasons. Capital gains tax was changed backwards and forwards. And recent, incoherent changes to income tax mean that people face marginal tax rates of 60 per cent in incomes between £100,000 and £114,950, but 40 per cent just above and below this.
This flawed system has real economic costs: disincentives to work and save, more expensive compliance and greater avoidance and evasion.
The Government has set out a long-term agenda on welfare reform, education and deficit reduction, and it makes sense to do this for taxation, too. The recent Mirrlees Review offers some useful signposts for reform. Corporate taxation, environmental taxation and the taxation of savings and income are all ripe for reform.
Of course, the Chancellor already has an important medium-term tax objective. This is to raise the tax-free personal allowance to £10,000 — helping people on low and middle incomes. The first £1,000 instalment of this policy will take effect this April. After that, further progress will be made as soon as it can be afforded. Quite sensibly, the gains from this bold — and therefore costly — policy are being focused on people on low and middle incomes, so the starting point for the 40 per cent tax band has been adjusted so those on higher incomes do not gain. In tough times, you have to take tough decisions.
Achieving the £10,000 personal allowance is the coalition’s tax priority. It is right that it should take precedence over other desirable reforms, such as getting rid of the 50 per cent rate of income tax.
You can read David’s article in full here (£).