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Our mini-series this week, in which Alex Wild of the TaxPayers’ Alliance, Sam Hall of BrightBlue, and Robert Halfon MP each answered the question “What should Tories tax?”, made for fascinating reading.

While continued progress on battling the deficit has improved the fiscal position, the fact remains that there is no grand pot of money going spare (and the Chancellor should resist siren calls to pretend otherwise). And the lack of a majority, as well as the scheduling pressures of Brexit, mean that there is precious little opportunity to introduce new legislation. Therefore, tax reform is one of the few policy tools at the Government’s disposal, and it is one which the Conservative manifesto left quite open – pledging simplification, and some already-planned cuts to corporation and income taxes, but not anything more specific.

The question of exactly how the tax burden ought to be distributed is an interesting one in itself. Despite our three guest writers coming from different parts of the broad centre right, it’s notable that there were still some points on which they could agree.

First, they all shared a general focus on the importance of targeting improvements towards helping lower-earning workers – a principle promoted by ConservativeHome in our 2014 manifesto. The main method used to that end since 2010 has been raising the income tax threshold, but there are good reasons to consider variations on the theme now. For a start, some Conservatives wonder about what happens electorally if sizeable numbers of people are removed from the Income Tax base – does doing so weaken the public’s opposition to Income Tax rises generally? Halfon still sees it as a valuable tool, and there may yet be more threshold rises to come, but both Hall and Wild suggested a shift in focus to addressing the issue of National Insurance. The former pointed out that the NI threshold has lagged behind the Income Tax threshold, and should be brought into parity, while the latter suggested a more dramatic solution to the gap: unifying NI and Income Tax.

Second, there appears to be a broad preference for taxing income and consumption, not assets, investments, or wealth per se. That’s in accord with the general direction of travel in recent years – though one point of difference is on Council Tax. To my surprise, the TaxPayers’ Alliance appears to be open not only to a revaluation but to the addition of extra bands at the top end of the scale, if they came as part of a wider package of scrapping Stamp Duty. The political risk there is huge. Think of the row over the changes to Business Rates, then imagine it involves 30 million households, and some of the biggest losers are elderly, and you start to get an idea of why it would be so difficult for any government to even countenance.

Of course, not taxing wealth but taxing consumption instead is, in some cases, a relatively fine distinction, particularly when viewed in terms of Halfon’s proposal to tax luxuries. But the difference lies in the message different taxes send, and the varying ways in which they might change people’s behaviour. For Halfon, taxing the buyers of luxury cars to cover the costs of pollution is a signal that he does not want to penalise workers and business people for the unintended sin of driving diesel vehicles when going about their business.

For Hall, however, consumption taxes should be linked directly to the external cost of the activity – to compensate for it, or to deter certain behaviours in the first place. So tax drivers based on their road usage, given that fuel duty will be eroded by the development of electric cars. And tax sugar, to battle obesity. And tax plastics, to reduce waste and pollution.

Part of the problem with either of these approaches is that it requires the Exchequer to develop its taxes based on some kind of moral judgement about what’s desirable or not, be it in terms of what your drive, or how much you drive, or what you eat and so on. And we know that government can get such policies badly wrong – the mistaken encouragement of diesel vehicles being a good example.

Even if you don’t mind that, or if a position could be found that sufficient Conservatives are comfortable with, a more fundamental challenge remains. Are such taxes intended to raise money from things deemed bad, or are they intended to deter and eventually eliminate the activities they apply to? If they become a permanent and key revenue source, then have they not failed to change behaviour for the better? And if they succeed in changing behaviour, what then happens to the resulting hole in the public finances left by their success? It’s all too easy for a sin tax to become a permanent fixture, with Chancellors criticising particular activities while contentedly accepting the revenue from failed deterrent taxes.

The final area where a debate seems to be coming is around hypothecation. The possibility of an “NHS tax” has been floated – not least by Nick Boles, who argues that it ought to become the new purpose of National Insurance – while Halfon wants more hypothecated taxes across the board. As the Government has struggled to cut through with a clear fiscal response to Corbyn and McDonnell’s critique, the concept has gained Tory followers, largely because it’s felt to make it easier to explain to people where their money does and does not go. It’s obviously constricting, and even Osborne, who liked ring-fencing his spending for PR reasons, was loathe to lose freedom of action by ring-fencing income – rightly worrying about being stuck with imbalances between where money is tied up and where it might actually be needed.

Nevertheless, the idea is in vogue, and the clamour for a hypothecated tax for the NHS will surely grow as the next Budget approaches.

10 comments for: Tax reform offers the Government a rare opportunity to make real policy changes

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