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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15 Comments
Good post Tim. The report covers some interesting ground (tax simplification the need to have business and personal taxes at around the same level) and then as you’d expect for a TPA funded job it tags on a load of silly and predictable “tax the rich less” arguments.
The “flat tax” has been torn to pieces over the years, but those on high incomes still lust after it and the TPA will be their mouthpiece. Note though that the phrase “flat tax” it absent from much of their press releases about this now (as they know it’s a toxic brand) so they’re just calling it a “single tax rate” – which it isn’t, because it has a tax rate of both 0% and 30% in the system; it is in fact just the abolition of the top rate of tax. Ho hum.
Also, the abolition of stamp duty and introduction of “rent tax” appears designed to deliberately stoke up another property boom, as both will increase the desirability of buying over renting. Perhaps this is designed to try to recover the lost asset value that their funders have lost since the crash? I suspect so.
Should the next tax cut be to start phasing out the employers contribution to NI? It’s a tax on jobs.
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.”
Making the tax system far more sensible needn’t involve huge spending cuts – see my recent LDV post.
@Joe, Howard Reed’s system has rates of 0%, 9%, 49% and 52% (not including employer NICs) – no idea why he calls it a flat tax!
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.
Some of the other silliness that made it into the report:
http://politicalscrapbook.net/2012/05/taxpayers-alliance-report-sexual-jealousy/
“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. ”
Corporation Taxes cut mostly into rents. Funny they forgot to mention that.
Henry – you are right that Corp tax could cut rents. But I would be interested in your evidence that this is the main effect…
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.
who wins from a tax take of 33 percent of gdp?
why, those of us who want to see a limit to the govts ambitions to intrude into the private sphere of individual life.
that said, my most closely held desire is that taxation not exceed 40 percent of gdp, at any point of the economic cycle, and given that stable revenues can flex as much as 7 percent of gdp it does make 33 percent a sensible floor to aim for at the.height of the cycle.
The Taxpayers’ Alliance at first looks like another cut taxes on the rich trickle down economics think tank, with its 30% tax rate, but there some good ideas in their reports. Their merging of Income Tax and NI makes a lot of sense with its simple pay slip on P35-36 on http://taxpayersalliance.com/nicit.pdf. It would a create tax system that ordinary people (and many Lib Dems) could understand. It could even raise more tax revenue, as some tax avoidance uses avoidance of NI.
A Flat Tax rate at around 40% with high personal allowances at around £15-20K combined with land value Tax could raise as much tax as the current very complex so called progressive tax rates , while taking millions out of tax altogether. High income tax rates just creates more tax avoidance and often tax revenues fall after a rise in rates and increase when reduced. A flat tax at a reasonable rate would be more difficult to avoid both technically and morally. It becomes more difficult to justify avoiding tax on income when everyone pays the same rate.
Land Value Tax is much better way to tax the rich, as its impossible to move land off shore. Also one of the problems of income tax is its based on the income of one year, where as LVT taxes accumulated wealth. LVT would not disincentivise entrepreneurs, it has the opposite effect, it pushes them to investment the highest and best use of the land they own and stops them allocating capital into land speculation.