Alex Wild is Research Director at the TaxPayers’ Alliance.
George Osborne came into Government as a proponent of lower taxes, but also of flatter taxes. In Opposition he launched a Tax Commission to investigate how taxes could be made simpler and less burdensome: headed by Lord Forsyth, that Commission produced an excellent final report that recommended flatter tax structures to eliminate complications and loopholes from the system.
This belief in simpler taxes continued when he took over as Chancellor of the Exchequer; he referred to the tax system as a ‘spaghetti bowl’ in 2011. Back then Tolley’s tax “handbook” ran to a mere 17,795 pages.
The levers of power at the Treasury seemed to prove irresistible, though, as despite these principles the tax code is now a whopping 21,602 pages. As for the spaghetti bowl, at its latest count the Office of Tax Simplification (probably the only part of the public sector whose budget is too small) counted 563 structural reliefs, 380 “special cases”, 131 targeted reliefs and 62 thresholds.
How do we break this cycle? What would be the best steps to take for a Chancellor who believes in lower, simpler taxes to take on the sometimes unpopular challenge of tax reform?
1. Abolish the Autumn Statement
The first thing the Chancellor should say tomorrow is that his will be the last ever Autumn Statement. Having two major fiscal events a year creates uncertainty and is not conducive to good policy-making. In its current form as another major political event, it merely creates another opportunity for chancellors to add complexity to the tax system for short-term gain. If recent reports are to be believed, fiddly tax reliefs for the film industry were insisted upon because there was a good gag to accompany them – if that is true, it’s a sad indictment of how these events are used for quick scores in the media.
There is genuine optimism that the new Chancellor will eschew such an approach and use major fiscal statements for their original purpose rather than to announce a raft of policy changes. That would be welcome, but removing the Autumn Statement would remove the opportunity for future Chancellors to start using it as a media set piece again.
2. Introduce dynamic modelling for all proposed tax changes
HMRC’s Computable General Equilibrium (CGE) model has been trialled a few times since 2010 to analyse the dynamic effects of reductions in Fuel Duty and Corporation Tax. Unsurprisingly, the analysis of Corporation Tax showed that the cuts would reduce revenues by far less than expected. All major fiscal policy changes should be subjected to a model that shows how a tax change would impact on the wider economy.
Given that the left typically opposes cuts to the most economically damaging taxes such as Stamp Duty, Corporation Tax and Capital Gains Tax, if greater use of dynamic modelling showed that tax cuts would generate significant gains elsewhere in the economy it would further blunt their tired arguments. Dynamic modelling can also help to demonstrate why tax cuts that do not seemingly affect those who are ‘Just About Managing’ may actually feed back to them in the form of new job prospects, higher wages or a reduced cost of living.
Additionally, all members of the Treasury Select Committee should be allowed to submit a policy for analysis using the model each year.
3. Outline a plan to merge Income Tax and National Insurance…
The Chancellor should also heed the advice of the Office for Tax Simplification’s recent report on the alignment of National Insurance and Income Tax. Sensible policies like moving National Insurance to an annual assessment period like PAYE and aligning the rules for the employed and the self-employed may not be glamourous, but they would win him the plaudits of the tax technocracy and pave the way to a much overdue merger of the two taxes.
Ben Gummer’s idea a few years ago to rename National Insurance should also be revived. Printing of Employers’ National Insurance Contributions on payslips should be mandated and the employee and employer charges renamed “earnings tax” and “wages tax” to better reflect reality.
The TaxPayers’ Alliance published a note just a few weeks ago that showed what a transition plan could look like. Such a plan can also protect pensioners, as we suggested. Moving to a single income tax would make pay slips more honest, as well as removing reams of pages from the tax code.
4. …alongside a plan to simplify capital taxes
George Osborne’s drive to cut Corporation Tax was one of the best things he did as Chancellor and Philip Hammond should continue on this path.
While reducing the rate would be a good move, the truth is that Corporation Tax will continue to be a headache for any Chancellor. There will always be headlines, many of them misleading, about “tax dodging multinationals”. The simple truth is that whether one thinks these companies are doing wrong or not, the tax system is so complicated that the issue will not abate.
Corporation Tax is likely to continue to be of diminishing importance to the public finances and has not long term future. Again, the TPA has put together outlining a step-by-step guide on how to abolish it, along with other taxes to make capital taxation far more coherent.
In the interim, Hammond should announce a consultation extending the REIT (real estate investment trust) option as a step towards distribution-based corporate taxation. REITs are exempt from corporation tax on qualifying income, but are required to distribute a certain percentage of this income to investors, removing the double taxation of investment income at a corporate and shareholder level.
A robust plan on simplifying and modernising capital taxation would also demonstrate just how serious he is in embracing the opportunities afforded by Brexit.
One of the problems with tax reform is that the politicians who enact it may no longer be in power once it starts to reap benefits. That – perhaps understandably – numbs the incentive to place too much political capital in something that may not provide any return. Here’s hoping Mr Hammond makes an economic statement in the national, post-Brexit interest.