Ryan Shorthouse is the CEO of Bright Blue and Sam Robinson is a senior researcher at Bright Blue. They have co-authored a new report, ‘A vision for tax reform in the 2020s

The UK Government has, rightly, committed to three preeminent economic, social, and environmental objectives in the years ahead: boosting growth and living standards; levelling up the country; and achieving net zero greenhouse gas emissions by 2050. 

Unusually for a Conservative Government, there is a high degree of tolerance for historically high levels of taxation and spending. This is a very different situation to after the 2008 financial crisis, when the Coalition Government cut both taxes and spending – the latter deeply.

The Chancellor recently announced the Spring Statement Tax Plan, with a vision for a lower tax economy. This seemed to mark a return to conventional conservative thinking. But official Government policy is still consistent with a more social-democratic model.

If high levels of public spending to meet major objectives are to be maintained whilst servicing current budget surpluses, this country will need to pursue a tax reforming – not solely a tax cutting – agenda. As well as shoring up the public finances, tax reform can also play a positive part in achieving economic, social, and environmental objectives.

We believe the Chancellor can be much more ambitious with tax during this Parliament. Nevertheless, reforms to taxation can be incredibly politically contentious, meaning it is under-utilised as a tool to help achieve positive and far-reaching change. 

If tax reforms are to be both effective and ambitious, it is vital that proposals derive from clear principles that attract sufficient political support. For the past two years, the team behind Bright Blue’s project on tax reform has sought to do exactly this. We now propose nine key principles that should underpin an ambitious programme of reform, supported by policy recommendations to achieve them. 

First, that the tax system supports effort, enterprise, and entrepreneurialism. Tax in the UK is increasingly falling on income from work rather than from other activities. It should be an urgent priority to better reward people’s effort by reducing taxes on work, especially National Insurance and the Health and Social Care Levy. Doing this, alongside broadening their scope to include pensions and rental income, would spread the impact of these taxes more evenly across the incomes and ages, reversing the troublesome shift of overall tax onto workers.

Second, the system should fairly tax income derived from luck, rent-seeking, and externalities. If the tax system adequately taxed income derived from these sources, we could lower taxes on more productive activities in a more sustainable manner. For example, Inheritance Tax’s current design means that many life-enhancing transfers of wealth go untaxed. It should be replaced with a Lifetime Receipts Tax.

Third, activities by individuals and institutions should be treated more equally. The current design of the tax system leaves individuals and institutions receiving the same amount of income paying vastly different effective tax rates. Self-employed people pay considerably less than workers, largely thanks to Employers’ National Insurance, meaning businesses have an incentive to contract labour on a self-employed basis. The Treasury should aim to reduce the difference between employees and the self-employed, initially by focusing on cutting employers’ National Insurance Contributions.

Fourth, tax policy should incentivise investment to facilitate long-term growth. The Government has recognised the role tax policy can play in spurring business investment through the ‘super-deduction’. However, this currently ends in 2023, and the headline Corporation Tax rates are scheduled to rise. The UK therefore has one of the least generous systems of capital allowances among OECD countries. The Treasury should move to a system of full immediate expensing of capital investment when the super-deduction expires in 2023.

Fifth, we need to ensure sound public finances. Simply borrowing more and more to meet today’s spending demands is economically and morally unacceptable. A tax-reforming agenda needs to ensure that the UK’s fiscal trajectory is sustainable, whilst also ensuring value for money in both spending and tax reliefs. The Government could follow the German model, which legally mandates biannual reviews of corporate tax reliefs based on a standard evaluative framework including: target accuracy, cost-effectiveness, necessity, and sustainability. 

Sixth, taxes should be easier to understand and harder to avoid. A needlessly complex tax system is confusing, reducing tax transparency and politicians’ ability to explain what tax reforms are achieving. Some taxes – particularly Inheritance Tax – are easily avoided. The Government ought to tighten eligibility for key Inheritance Tax reliefs such as Agricultural Property Relief or Business Property Relief.

Seventh, the tax system should support the Net Zero agenda. The UK’s current carbon pricing across different economic sectors is insufficient. Certain sectors such as aviation and residential gas effectively receive subsidies for carbon emissions. A standard, economy-wide carbon tax is not feasible. However, the Government should set a target price range for carbon taxes across the whole economy by 2030, with a ‘floor price’ that each economic sector would have to achieve at a minimum, to facilitate consistent carbon prices across different sectors. 

Eighth, future reforms should protect and enhance the livelihoods of the poorest. The Government has taken action to blunt the impact of the new Health and Social Care Levy, but more should be done with tax to protect the poorest. A new ‘Green Dividend Framework’ should be established, made up of the revenues from existing and new carbon pricing measures; a specific portion of funds from these revenues should be used to reduce the impact of rising prices on low-income households and vulnerable customers.

Ninth, our tax system should address regional imbalances. Council Tax falls disproportionately on properties outside of the South East. Stamp Duty Land Tax also plays a part in slowing progress on levelling up by removing incentives to move home. It is time to replace both taxes with a Proportional Property Tax based on the value of people’s homes, with tax exemptions for those under £50,000.

The recent Spring Statement Tax Plan can and should be supplemented: to not just always ideologically fixate on lowering taxes, but to use tax as a tool to help a much wider set of economic, social and environmental goals. Ultimately, we believe that tax can achieve its potential as a substantial policy lever that facilitates bigger and bolder changes.