System Needs Shake Up

Five years research and numerous consultations have culminated in the recent release of the Institute of Fiscal Studies' final report on the UK tax system.

The Mirrlees Review commissioned a high profile group of international experts and researchers to identify the characteristics of a good tax system for any open developed economy in the 21^st century, to assess the extent to which the UK tax system conforms to those ideals and to recommend realistic reform.

The Review is published in two volumes:

(1)               Dimensions of Tax Design, dealing with different aspects of the tax system; and

(2)               Tax by Design, setting out the conclusions of the Review.

The report describes our tax system as being inefficient, inequitable and overly complex. Many may question why it took so much time and money to reach a conclusion that has been known to so many of us for a long time now. The review, led by Sir James Mirrlees, does, however, make some radical reform proposals such as:

• Integration of income tax and NICs; the review concludes that, “National Insurance no longer serves any purpose as a separate social insurance contribution linked to benefit receipt. Maintaining it as a separate tax serves only to create confusion and complexity”.

• Extend VAT to nearly all types of spending; thereby reducing complexity and making consumer choices easier. Additional revenues raised could be offset by lowering income tax and raising benefits. 

• Replace fuel duties with a national congestion charge system.

• Abolish Stamp Duty and replace Council Tax; a new Housing Services Tax would be imposed, acting like VAT on housing and ensuring that such a charge was proportionate to current housing values.

• Overhaul taxation of savings;  basic bank and building society accounts should be completely free of tax. The current tax treatment of pensions and Equity ISA's should however remain.

Sir James Mirrlees stated that the cost of the UK tax system could be reduced without disturbing the levels of revenue raised and redistribution. He also said, “While some of the reforms we recommend involve tweaks to current policy others involve change, which is radical and is for the longer term. There is no getting away from the political difficulty associated with some of the proposed changes – but there is also no getting away from the enduring costs of failure to reform.”

With regard to the 50% top rate of tax the final report could not be clear as to whether this will raise any revenue at all.  It doubted that significant additional revenue could be raised by merely increasing rates for the very highest earners and suggested that a rate below the 'revenue-maximizing rate' may be a more politically astute move if concerns existed as to how much a disincentive the top rate was to their future behaviour.