Governments must learn that taxes need reforming not raising
This time next week, we will know the outcome of the General Election. But whoever wins, one thing is clear – the amount we pay in taxes will be going up.
After Philip Hammond’s latest Budget, the Office for Budget Responsibility (OBR) calculated that the tax burden – the share of GDP taken by the Exchequer – would rise to 34.4pc in 2019-20. This would be the highest level recorded in the UK since the late 1960s, when Roy Jenkins was the chancellor of the exchequer in the Labour government led by Harold Wilson.
The main opposition parties have signalled they could push taxes even higher if they were elected. Labour’s plan is to raise extra money from businesses and high earners. The Liberal Democrats have proposed a one penny increase in all income tax rates to fund extra health spending.
If the Government was running a massive deficit, the need to raise extra revenue from taxation would be understandable. But in fact public borrowing has been coming down recently. Last year, the Government borrowed £48.7bn – 2.5pc of GDP. In relation to the size of our economy, government borrowing is now back to the levels we saw before the financial crisis.
Even without the increases in taxation proposed by the Labour Party and the Liberal Democrats, the OBR expects the Government to be raising £800bn in taxes by the early 2020s. On average, that is nearly £30,000 being paid to the Government on behalf of each of the 27million households in the UK.
The taxes which are most noticeable to working people – income tax and National Insurance – make up nearly half of this total. Taxes on spending – mainly VAT, but also specific taxes on motor fuel, alcohol and tobacco – raise about a third of government tax revenue. The rest of government tax receipts are generated from corporation tax and business rates, or from specific taxes on property, like stamp duty and council tax.
If the tax raised in the UK is likely to be equivalent to nearly £30,000 per household by the end of the next parliament, it is disappointing that there is not more debate about the structure of the tax system used to generate this large sum of money. No political party is campaigning on the platform of reforming the tax system to encourage economic growth, employment and enterprise. The Conservatives are seeking to defend the status quo while the other major parties are proposing tax rises.
From a political perspective this is very understandable. A major reform of the tax system would create winners and losers. In a general election, you cannot guarantee that the winners will vote for you, but the losers are likely to vote against paying more. This has already been apparent in the debate over how much we might need to pay for social care, which was triggered by proposals in the Conservative manifesto.
But once we get beyond the election, I would hope that a newly elected government can start to show some interest in tax reform. There are a wide variety of issues which need to be addressed to make the UK tax system more “fit for purpose” in the 21st century global economy – but three in particular stand out for me.
The first is the National Insurance system, which is a covert tax falling most heavily on those with modest incomes. It has also not been adapted to the increasingly flexible UK labour
‘A spending tax system designed in the early 1970s is not helping us to address 21st-century issues’
market, with larger numbers of self-employed and part-time workers.
Even though the threshold for income tax has now been raised to £11,500, National Insurance kicks in at a much lower level of income – just over £8,000 a year. The combined rate of employer and employee national insurance is 25.8pc – 12pc paid by the employee and 13.8pc paid by the employer. This is a higher rate of tax than the 20pc basic personal rate, and yet no political party has advanced any proposals to help relieve the burden it imposes on workers with lower incomes.
The second big tax issue is the way we tax spending. Here, Brexit could provide an opportunity. The UK would have more flexibility to change its system of VAT outside the EU – and we could introduce a totally different type of system for taxing spending, closer to a Us-style sales tax.
The UK’S system of VAT was introduced in 1973 when we joined the EU and it has changed very little since. It is riddled with anomalies. For example, a printed book is zero-rated for VAT but the equivalent e-book or audio book faces a 20pc rate. The VAT treatment of crisps and snacks depends on how they are classified by the tax authorities. Some face 20pc VAT, others are zero-rated.
Nor has the VAT system kept pace with the changing social and environmental agenda. All food is zero-rated for VAT and yet obesity has become a major health issue. We still tax domestic fuel bills at a lower rate of VAT, even though we know that our domestic energy use adds to the problem of climate change. A spending tax system designed in the early 1970s is not helping us to address these 21st-century issues.
The third major tax issue is the way in which we tax property and land values. Again, this is an area of taxation which has not been comprehensively reviewed for some time. The valuations underpinning council tax have not been updated since the early 1990s when the tax was introduced.
The Government has sought to raise property taxes through stamp duty, but this penalises people who need to move house and stops the property market working efficiently. The best way to tax property is not to penalise people who need to move, but to establish a more effective means of raising tax on the accumulated land value.
These three big tax issues have not featured at all in the general election campaign. But that is not a great surprise. The politics of a general election campaign do not encourage the discussion of these important underlying issues.
However, after the General Election, we should be having a serious debate about how the money which flows to the Government is raised through the tax system, not just about how it is spent.