Taxpayers’ Alliance report on tax – good in parts

The Taxpayers Alliance and Institute of Directors have just produced a 417 page report on the British Tax System. Some parts are good, some are plain silly.

Let’s get the silliness out of the way first. The report says the tax to GDP ratio should be 33%, and marginal tax rates (including employers’ national insurance) should be no higher than 30%. They believe this will spur growth. The reality – sadly for right-wingers – is that there is little evidence that even French tax rates preclude high levels of GDP per hour worked. Nor is there good evidence that individual tax rates are pernicious unless really high. The report tells us (p. 201) that the US has the 5th highest corporation tax, while Serbia has the lowest. Despite that, I put my money on the US to beat Serbia in economics, any day.

Limiting government to 33% of national income requires big spending cuts, which are not spelt out. We could abolish middle class welfare (end child and pensioner free prescriptions, abolish winter payments and pensioner television licences, etc), and make the poor even poorer. We could cut the military, eschewing foreign intervention, defence of Gibraltar, the Falklands, etc. We could force all railway and tube lines to cover their costs, or close. We could end all arts funding. We could charge to give birth in hospital (if you can’t afford children, don’t get pregnant), and so on. Those who want lower taxes should specify their cuts, just as those who want more spending should specify their tax rises.

The final omission is that the report makes no effort to calculate who wins from the tax cuts. It is not that hard to download the data and produce Institute for Fiscal Studies style bar charts.

Yet it would be wrong to dismiss the report. It sets out the case for tax simplification – it costs £300m a year in additional bureaucracy to run national insurance as well as tax, and explains what needs to be done to merge these two. This is a really useful route map.

There is sensible material on taxing capital so that people don’t favour debt or equity, and no-one has an incentive to create weird financial assets to meet technical tax rules which are hard for everyone – including regulators – to assess.

There is good stuff too about why we should abolish corporation tax. Not to help business, but because corporation taxes must either cut returns to entrepreneurs, cut wages to workers, or raise prices to consumers. Whether you are left or right, better to decide which of those you want to happen, and do it properly, rather than levying a tax that may or may not be paid by the people you want to pay.

There is good material too on the treatment of pensions and pensioner incomes, although the discussion of land and environmental taxes is weaker. For example, the call to abolish Air Passenger Duty relies on industry funded material for numbers, and does not comment on aviation’s exemption from VAT.

Finally, the report would have really benefited from an index!

* Tim Leunig is Chief Economist at CentreForum. He served as an advisor to the Barker Review on Land Use, and is a former Inside Housing columnist.

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  • Old Codger Chris 21st May '12 - 3:40pm

    Should the next tax cut be to start phasing out the employers contribution to NI? It’s a tax on jobs.

  • Daniel Henry 21st May '12 - 4:30pm

    I thought there were some interesting ideas on a PAYE style system to tax dividends as they are distributed (reducing self-assessment admin and reducing avoidance/evasion) which would be worth looking at.

    But yeah, only a few good ideas among a LOT of silliness…

  • Good critique Tim.

    I think the report is a useful addition to the debate on tax reform. Historically, the UK has rarely been able to effectively collect above 38% of GDP in tax, whatever the methods employed. If we are ever to contemplate any significant reduction in the national debt, public spending will need to fall below the level of tax receipts at some point in the future. With departmental spending being held down or reduced as a % of GDP over the next five years, the search for future reductions will inevitably turn to welfare spending. Tax reform will be an essential element of this program, if only to mitigate the distributional effects of reductions in welfare spend.

    A flat tax can be highly progressive as Howard Reed of Landman Economic demonstrates on page 78 of the Centreforum reportTaxing decisions

    “a large-scale increase in the income tax personal allowance combined with a flat income tax rate of 40 per cent on gross incomes between £20,000 and £130,000 redistributes the burden of income tax away from earners in the middle of the income distribution and towards top earners.”

  • jenny barnes 21st May '12 - 5:19pm

    Inheritance – and gift tax should be treated as part of the recipients income. Possibly spread over up to 10 years, to even out the impact. Not eliminated entirely as suggested in this report.

  • Old Codger Chris: We are working on this at CentreForum…

  • “There is good material too on the treatment of pensions and pensioner incomes”. Perhaps I have missed it, but I can find nothing concrete on how to tackle the fact that pensions are not subject to national insurance deductions. There is a vague reference to the need for some sort of transitional arrangements and “some kind of lower rate for those who have invested and paid under the current system”, However it is this problem which has defeated all previous efforts to rationalise the tax and national insurance system. Moreover the report suggests that abolishing capital gains tax will result in higher returns for pension investments, thereby improving pension incomes, and balancing to some extent the higher combined tax rate. However pension investments do not incur capital gains tax and it is therefore somewhat worrying that such a red herring should have been thrown into the debate.

  • Unless and until there is some transparency on exactly who is funding the TPA and it’s ream of “directors”, I can see no rationale for engaging with the TPA at all.

    We run the risk of legitimising these people.

  • Daniel Henry 21st May '12 - 9:21pm

    Some of the other silliness that made it into the report:

  • Henry – you are right that Corp tax could cut rents. But I would be interested in your evidence that this is the main effect…

  • Paul Reynolds 22nd May '12 - 7:24am

    The NI is one of those symbols of spin and tactics trumping strategy and policy.

    When it was a hypothecated tax it had a kind of logic. But now it just goes into the Consolidated Fund, it is just i.income tax. The political obstacles to the reform of NI are twofold – it enables politicians to promise income tax changes but increase income tax via NI on the quiet, and the fiction that ’employers pay part of the tax’…thus reducing perceived tax levels.

    But it doesn’t stop there. Thousands and thousands of smaller business proprietors prefer to take their income as dividends rather than salary do so because they can avoud NI. This is the fiscal tail wagging the dog. Dumb journalism prevents abolition of NI and it’s renaming as income tax. But since it will close the loophole and affect corporation tax changes it will need to be included as part of corporate income tax reform.

    The scope exists, thus, to reduce the NI rate as it is merged with income tax without reducing tax revenues. But.all PR weapons will be needed to combat ‘income tax rise’ silliness in the media.

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