Andrew Lilico square By Andrew Lilico

The Emergency Budget last year was rightly focused upon announcing a credible plan for cutting spending to reduce the UK’s huge structural deficit.  This year’s Budget gives George Osborne an opportunity to sketch out more of his longer-term vision for the economy.  That might include all sorts of elements, and I’m not going to try to produce a comprehensive list today.  But here are five things to think about to get him going.

1. What is the right number of income tax rates?
Howe and Lawson thought two; Major and Brown used a third at the bottom; Brown then abolished the lower rate, but Darling introduced a higher rate.  I think the right number is two for the medium term: a basic rate and a higher rate (if income tax is to be paid by most earners); and for the longer term either these two or just one rate (if the structure of the tax system were to change and income tax apply only to high earners).  What does Osborne think?

2. What is the right rate of income tax?
Lawson thought the right rates were 25% and 40%.  It wasn’t that he couldn’t have cut the basic rate lower than this – he had money for a time.  But there is a decision to be made about the balance between the rate charged and the personal allowance — in essence, the higher the ideal personal allowance, the higher the ideal income tax rate.  I think the right rate for the medium term is 25% for the basic rate; 40% for the higher rate.  (If we move to one rate longer-term, I presume it would be 40%.)

3. If money becomes available at some point in the medium term for personal tax cuts, where should it go?
There are five basic plausible options (assuming we’ve already moved to a two-income-tax-rate system):

  • cut VAT;
  • cut employee NICs;
  • cut the basic rate of income tax;
  • raise the basic rate threshold;
  • raise the higher rate threshold.

I believe that the highest priority should be raising the basic rate threshold, followed by cutting VAT.  I believe the basic rate should be higher (so that shouldn’t be on the agenda at all), that the rate of NICs should be determined by the needs of the National Insurance Fund (we need to re-instate the principle of insurance, rather than seeing NICs as a tax), and that it’s okay if far more people pay the higher rate.  Cutting VAT should definitely be considered as a tax-cutting option – I don’t see why VAT levels are seen as any less legitimate targets for tax cuts than anything else.

4. Should National Insurance stay as one aggregate payment?
Or could it be useful to disaggregate it into a number of social insurance premia — e.g. a state pension contribution; a sickness insurance contribution; a health insurance contribution; etc.  These are already conceptually contained within NICs (I’m not here talking about changing the basis of funding for these services — that would be a separate discussion) but, unlike many other countries, we do not separately identify such payments in people’s tax statements.  Could it aid the government’s transparency agenda if the amounts people pay in National Insurance Contributions for these different services were explicitly identified?

5. What is the long-term concept of corporate taxation?
Brown introduced a system that gave a favourable tax treatment to debt, increasing very significantly the taxes applied to equity (that worked out well, didn’t it?).  Does Osborne want to move away from this over the medium term?  If so, to what?  He has certain basic structural options: equalising the tax treatment of debt and equity, but taxing each more highly than recycled profits; equalising the tax treatment of debt and equity and equalising these with the treatment of recycled profits; favouring equity over debt (perhaps debt is bad?); removing taxes on recycled profits altogether and only taxing disbursements (which would entail introducing taxes on certain classes of capital movements out of the country).

There are lots of other issues to address, of course.  But there are five to start with.

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