David Martin’s new Centre for Policy Studies (CPS) paper “A new, simple, revenue neutral tax code” highlights the ever-increasing complexity of the tax code, which now has over 12 times as many words as the King James Bible.
Our Budget 2016 ‘wishlist’ seeks to reduce the uncertainty created by tax complexity, but also appreciates that the Chancellor’s fiscal outlook has declined since the Autumn Statement. Our proposals advocate a series of fiscally balanced measures to reduce complexity of the UK’s tax code and promote economic growth.
Michael Johnson’s most recent CPS paper “The 2016 Budget: Pensions” suggests a number of scenarios to reform the UK’s tax based incentives for pensions, which cost over £52 billion in 2013-14. Reports suggest the Chancellor has dropped proposals to lower the rate of tax relief for higher rate earners. This leaves the Chancellor with a number of other options, including the ending of NICs relief on employer contributions.
- Recommendation 1: The ending of NICs relief on employer contributions to pensions could be a possible route for the Chancellor to take, saving the Exchequer £8 billion a year while reducing complexity in the system. This change would be simple to implement and there would be no adverse impact on the self-employed, who cannot benefit from NICs relief on pension contributions.
Prior to the election 2015, David Cameron pledged that there would be no increase in income tax, VAT or NICs. Given the declining outlook of the public finances since the Autumn Statement, the Chancellor may look to raising fuel duty at a time when oil prices are low.
- Recommendation 2: If the Chancellor seeks to raise further revenues from fuel duty, he should simply introduce a modest increase. He should avoid any mechanism that will add complexity to the system.
The Chancellor should look to see whether Government departments are rushing spending towards the end of the financial year, and whether any savings can be made. The National Audit Office in 2015, for example, found that the Department for International Development had to quickly fund new activities to its plans to satisfy the international aid target of 0.7% of GDP. This is not a sensible use of taxpayer funds.
The Chancellor should also review whether some Government departments can be abolished altogether. Competences of the Department for Energy and Climate Change, for example, could be transferred to the Department of BIS and DEFRA.
- Recommendation 3: The Government should review whether further efficiencies in Whitehall can be achieved. This should include oversight of Government departments that appear to ‘rush’ spending towards the end of the financial year, and whether some departments can be abolished altogether.
Tax Simplification and Tax Reduction
The UK’s tax system is around 21,000 pages long and has around 1,100 tax reliefs. The Government should tackle this by focusing on:
- Recommendation 4: Reforming Inheritance Tax: The UK currently faces one of the highest effective inheritance tax rates of any country in the developed world. Cutting inheritance tax from 40% to 20%, (paid for by ending the agricultural property relief and business property relief) would be a simpler and less distorting reform than the government's current proposals.
- Recommendation 5: Dealing with Marginal Tax Rates: High marginal tax rates are leading to poor work incentives and anomalies throughout the tax system and should be reduced where possible. For example:
- for the low paid (particularly for those receiving tax credits), the effective marginal rate of tax can be 73% (or higher in some cases)
- a single earner with three children earning between £50,000 and £60,000 faces an effective marginal rate of 66.5%
- an individual earning between £100,000 to £121,200 has an effective marginal rate of 62%.
- Recommendation 6: Cutting top rate of tax from 45p to 40p: If the Chancellor can make a robust case that the Exchequer will benefit from such as change, he should implement it at this stage of the electoral cycle – given that the measure will be politically tough to implement.
- Recommendation 7: Merging NICs & Income Tax: The Office for Tax Simplification has recently published a report calling for a closer alignment of income tax and national insurance. The Chancellor should set out a clear pathway to achieve the eventual merging of these two taxes. CPS Research Fellowes Michael Johnson and David Martin have both written publications in this area.
Corporation Tax Exemption
- Recommendation 8: Abolish corporation tax for small businesses: CPS Chairman Lord Saatchi has previously called for an end to corporation tax for small firms. We are encouraged by recent findings of the Office for Tax Simplification, which suggests that some small businesses could by income tax on profits directly rather than corporation tax. The Chancellor should set out a clear pathway to alleviate the burdens of corporation tax on small firms.
- Recommendation 9: Reduce the high unilateral UK Carbon Price Support: The UK Carbon Price is currently over £18 per tonne of CO2 emitted compared with an average of £6 in the EU. This needs to be cut before it forces the premature closure of more baseload power plants and thus threatens energy security and affordability. CPS Research Fellow Tony Lodge has advocated this in his publication the “Great Green Hangover.”
- Recommendation 10: Boost Private Housing: The Autumn Statement’s commitment to 400,000 additional homes, new planning reforms and the release of public land for building was welcome. However, more needs to be done in this area. Annual housebuilding completions reached 125,000 in 2014-15, dwarfing the 320,000 needed to alleviate housing strains. The Chancellor should identify so-called ‘Pink Zones,’ where existing regulatory burdens would be reduced (see Pink Planning by Keith Boyfield and Daniel Greenberg).
- Recommendation 11: Introduce Infrastructure Project Bonds: The Government has committed £100bn of spending on infrastructure. The Budget should set out the creation of infrastructure bonds to finance investment, which could potentially provide attractive yields for investors and unlock new streams of cheap infrastructure finance.
- Recommendation 12: Direction on Airport Capacity Expansion: A new runway is desperately needed in the South East to continue promoting trade and investment into the UK. While a final decision on increased airport capacity is unlikely to be announced in the Budget, look out for any indication as to whether a final decision will be confirmed over the coming months.