We need to talk about taxation
The run-up to this year’s budget will be dominated, as always, by issues of tax and growth. As is usual for the time of year, campaigners are full of whizz-bang ideas to fiddle with the tax rates to further their own interests or cause. And with the economy bumping along the bottom, MPs will be looking to the chancellor to come up with a plan that gives some shape to the country’s economic future, while the public just want some reassurance that things will improve.
What is less well understood is the way that these two issues, tax and growth, fit together. We debate it for particular taxes, but not for the taxation system as a whole. The difference between this and previous budgets is that we now have in the public domain all the evidence of the Mirrlees review – the first comprehensive look at what makes a good tax system for 30 years, the final conclusions of which were published by the Institute of Fiscal Studies in September last year.
Giving evidence to the Treasury select committee shortly after the report’s interim publication, the director of the IFS, Paul Johnson, stated that if the recommendations were implemented, they would have a noticeable positive effect on the growth of the UK economy, to the tune of ‘percentage points rather than tenths of percentage points’.
So there we have it. Our tax system as a whole is holding us back just at the time when we need all hands on deck to get growth going. What’s more the Mirrlees proposals would not just be more economically efficient but also be more environmentally friendly and, in their own words, raise ‘roughly the same amount of revenue as the current system … while redistributing resources to those with high needs or low incomes to roughly the same degree’.
So how can this be done? Well, it’s all very controversial stuff which is perhaps why the politicians are sticking their heads as far into the sand as they will go. The highlights are to abolish stamp duty and base council tax on an up-to-date valuation of houses (political cowardice has meant this has not happened since 1991). To improve work incentives for individuals around pension age – between 55 and 70 – and parents of school-age children. This could increase total employment by over 200,000 and total earnings by nearly £3bn. Integrate income tax and national insurance, ending the con that somehow if you call it national insurance it’s a better tax when it’s spent on the same thing. Apply VAT to everything including financial services and use the money raised to redistribute to the poorest.
It carries on: a consistent price on carbon emissions and a comprehensive system of congestion charging on the roads, to replace most of fuel duty. They say ‘the potential economic and welfare gains are very big’ from this alone – it’s not hard to see the instant advantages for trains, cities, motorways and rural poverty. Standard bank and building society accounts should be entirely free of tax (good for grannies) and for other substantial holdings of risky assets only returns above the ‘normal’ rate should be subject to tax, which should then be taxed at the same rate as earned income. This would reduce avoidance. And for business, equity and debt-financed investments should be treated the same, which they say could increase size of the economy by around £2bn.
I don’t expect George Osborne to do much of this. But surely as a package, isn’t it exactly the type of thing that a Labour party in opposition should be debating?
Kitty Ussher is a former economic secretary to the Treasury, a research fellow at the Smith Institute and writes the monthly Economy column on Progress
economy, George Osborne, growth, Institute for Fiscal Studies, Kitty Ussher, Labour, Mirrlees review, taxation, VAT