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Alex Morton was a member of David Cameron’s Downing Street Policy Unit.

The Budget this year is early – March 8th, two weeks from today. If the Conservatives win Copeland, an early election’s chances increase. Even without one, the Budget must manage two feats for Theresa May’s foreign and domestic strategy. It must show both we are a pro-growth nation and that we will support those on middle incomes.

The UK has avoided the populist pitfalls of a Trump or a Marine LePen. The Party is miles ahead of the Labour. But the quickest way to destroy that politically is pledging zero corporation taxes and a flat tax. Similarly, the quickest way to reduce growth is to show that we will increase regulatory and taxation burdens and copy the Eurozone’s interventionist model.

So the budget must focus on ways to improve our economic performance without overly favouring big business. With that in mind, some fairly radical measures are set out below. Any spare money from higher growth or tax receipts should go toward raising the starting and top rate income tax thresholds in line with the 2015 Manifesto – so the measures below are all broadly fiscally neutral.

Change pension reliefs, trust law and dividend taxation

We need to have a simpler and fair taxation system. As part of this, pension relief should be capped at a lower level of 30 per cent with lower annual and lifetime payments (although the annual limit can probably not go much lower than £25,000, since people tend to backload saving in their final working years). Reform should bring in substantial sums, given the Treasury’s estimate annual costs of £48 billion in pension tax relief.

Further, if Theresa May and her advisers are serious about fairness, there is also scope to review ‘trusts’, which offer the rich a way to avoid tax. There is a vast cornucopia of tax privileges that should frankly be swept away: while trusts have their place (i.e: holding assets for minors) it is hard to see why taxes on them should differ from taxes on ordinary people, and a review should start from that premise.

There is also an argument that dividend taxation should be simply rolled up into wider income tax – too many people on higher incomes pay themselves in dividends to reduce paying income tax. Why should income thresholds differ for income from work compared to income from dividends? At the very least the rates could be brought slightly more in line. All this would raise serious money.

Cut marginal tax rates on work and eventually bring NI and Income Tax together

For many on low incomes, marginal tax rates are too high. The ‘taper’ for universal credit is still set at a very high 63 per cent. This taper should be reduced so that work pays for those on low to moderate incomes and to encourage people to move back into work (or, more often, to increase their hours). This would not only help lower income households, but middle income households on between £20,000 and £35,000. Similarly, action is needed on one of the highest marginal tax rates in the OECD: the 60 per cent rate that occurs at £100,000 due to the withdrawal of the personal allowance – a staggeringly high rate that clearly damages economic activity. This is projected to hit over a million workers by 2018/9, and should be scrapped by dropping down the 45 per cent rate to £100,000.

Finally, a pledge to merge NI and income tax would simplify the system and increase the thresholds to bring them in line with income tax would be a major tax cut for those on middle incomes. The generosity of any measures would be linked to the action taken in future – although were there to be an election taxes could be cut now – with changes and rises afterward.

Stamp Duty changes paid for by higher council tax bands

There is also an issue with stamp duty. The current rate of ten per cent over £925,000 is too high, and has helped seize up the market in parts of the South and London. New homes built fell in London from 25,000 homes to 17,000 homes from 2015 to 2016, because developers rely on transactions and the chains created when people move up the ladder. This threshold should be increased as far as possible. However, this should be paid for by new higher council tax bands – extending the existing band H (which only consists of the top one per cent) by adding a few more bands for very high value properties.

Simplification of taxation and no more gimmicks

Governments since Lawson have loved to fiddle around the edges with a fund for this and a relief for that. Most of this tinkering is unhelpful, and more focused on short-term headlines than long-run economic reform. Philip Hammond could commit to some tangible metrics – i.e: reducing the tax code in length by 25 per cent by 2019or pledging to abolish three taxes in each budget. This would help cement Hammond’s reputation as a serious chancellor – and of course goes hand in hand with this budget not having too many gimmicks.

Business Rates – sharing the load more fairly

There is also a need for action on business rates. This cannot be a major tax giveaway for the reasons outlined last Friday on this site by Paul and because, as Sajid Javid has pointed out, the vast majority of businesses benefit from current proposals (mostly outside more affluent safe Tory areas). However, there needs to be a cap for rises at, for example, ten per cent, paid for by new measures to widen the tax base through a review of how business rates operate that seeks to ensure non-physical retailers such as Amazon are paying a fair share of corporate taxation. At present, too many of the businesses most affected are labour intensive (e.g. retail) or just above the small business threshold (e.g. a family owned chain of just two restaurants). This subject could consume a whole article – but, at any rate, corporates with lower physical footprints need to pay their fair share.

An opportunity for spreadsheet Phil?

This is all particularly suitable for ‘spreadsheet Phil’, as the Chancellor has been nicknamed – someone unlike Osborne who is not trying to run Government by proxy or mastermind Tory election chances. Going through and reforming our system is clearly necessary – it has been nearly 30 years since our last great reforming chancellor, Nigel Lawson, and since then taxes have become more complex and more distorting. Eventually the UK needs more radical and serious free market reform – but that is going to have to wait. In the interim, some of the measures above can both help growth and show May is serious about helping working middle income households.

30 comments for: Alex Morton: Here’s a radical but workable plan for the Budget. Trade off simplified tax reliefs for lower marginal rates.

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