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The writer is founder of Tax Policy Associates
I recently sat down with tax policy wonks from across the political spectrum. There was a startling consensus on tax reform. Yes, those on the left wanted a higher level of overall tax than those on the right — they were never going to agree on that. But there was common ground on a series of reforms that would improve the UK tax system. The problem? Not a single one of them is ever heard in the political debate.
The issue is that any sane discussion of tax, let alone tax reform, is being crowded out by tax populism. The tax populism of the right is that we can cut tax without anyone (or at least anyone the populists care about) being hit by cuts in services or benefits. There’s a magic money tree of government waste that can be harvested without consequence. The tax populism of the left is that we can fund services without anyone (or at least anyone these populists care about) being hit by increased tax. There’s another magic money tree, where trade-offs don’t exist.
The absolute apotheosis of this is talking up wealth taxes. It ticks the populist boxes — only taxes people with £10mn of assets, raises a gargantuan amount (£20bn or more). So how come nobody’s ever implemented such a tax, applying only to a tiny number and raising such a large amount? The reason is simple: the hit to investment, jobs and growth. Credible models of similar US and German proposals suggest a long-run hit to GDP of 2 per cent to 5 per cent.
But what’s the only tax mentioned in the Labour deputy leadership race so far? Wealth tax.
The UK is never going to have a wealth tax. But the left’s obsession with it means that this parliament isn’t going to see any serious tax reform either. Here’s what we should do instead.
Reform inheritance tax. The measures in the last Budget risk breaking up family farms and businesses while leaving popular tax avoidance strategies untouched. We could fix both problems with a recent proposal from the CenTax research centre, which retains a 100 per cent exemption for farms and small businesses forming 60 per cent or more of an estate’s assets. And, handily, raises at least as much revenue for the Treasury.
Reform capital gains tax — and cut income tax. UK capital gains tax is currently too high and too low. Long-term investors are overtaxed, paying 24 per cent on inflationary gains, meaning sometimes 100 per cent or more on real gain. Short-term investors are undertaxed, as are people who’ve artificially rebadged labour income as capital gains. The answer: align the CGT rate with income tax, but only tax the real return. The proceeds would be enough to raise large sums and cut income tax.
Reform land taxation. Stamp duty is among our most destructive taxes: it makes people miserable, keeps them in the wrong homes and misallocates labour. Replace it with a modest, broad-based land value tax assessed on site value, not buildings. Yes, there are hard questions around deferral (for the “cash poor, asset rich”) and transition (so people don’t get hit twice), but the prize is big enough that we should try to answer them.
Reform corporation tax. When I was a junior lawyer, we sniggered at the useless, overly complex Italian tax system. The Italians had the last laugh. Today the Tax Foundation scores their corporate tax system as more competitive than the UK’s — even though our overall rate is lower. Why? Because of the spiralling complexity of UK corporate tax. Pull out those old Office of Tax Simplification reports and implement them.
Reform national insurance. The tax system taxes employment as if it’s a sin. Scrap employee national insurance and roll it into income tax. Make the change fiscally neutral — so most people get a tax cut (with the notable exception of landlords and retirees). Then begin the really hard task of working out how to cut employer NI over time. Absolutely, definitely, don’t put it up again.
Reform penalties. In the past five years, 600,000 HMRC late-filing penalties have been issued to people whose incomes are so low they don’t owe any tax. This is not something any sane tax system should be doing.
Reform VAT. The UK has the leakiest and most complex VAT system in the world. Our patchwork of zero rates and exemptions looks compassionate but ends up subsidising £2,850 Dolce & Gabbana dresses because they are in kids’ size. Scrap most exemptions. Use some of the revenue to protect low-income households directly (through benefits and targeted credits); use the rest to cut the standard rate.
None of this is easy. Every change upsets someone and requires careful design. But these are pro-growth reforms that could be legislated and implemented within one term of government. There would be political “cover” from think-tanks across the spectrum. The question is whether our political class has the courage to dump the slogans and embrace the art of the complicated. And to stop talking about a wealth tax.
