In fifteen days’ time George Osborne will give his first Budget speech of the new Parliament, in the form of his emergency Summer Budget. Much focus will be on how the Government plans to make the savings required to hit its spending targets, a question which the SMF has recently looked at in detail.
In today’s ESRC-sponsored Chalk + Talk event, the SMF invited Paul Johnson, Director of the Institute for Fiscal Studies, to address the other side of the coin: taxation. The way in which we raise tax has vital implications for how much the government can afford to spend on public services, and for how the wider economy functions. And there are certainly many areas of the tax system that need to be reformed. In today’s Chalk and Talk, Paul Johnson talked through his six main pieces of advice on how to change tax for the better.
1) Sort out the confusion of income tax and national insurance
We have two taxes on earned income – and they kick in at different thresholds, and with different rates. Other countries either have a single income tax, or they have social insurance that actually does something different to straightforward income tax. We have the worst of both worlds. Merging the two would be simpler and less costly to administer
2) Clarify how tax thresholds should rise
Some tax thresholds rise with inflation; some do not. That means that in some cases, for example income tax, greater numbers of individuals become liable for higher rates of tax. The same is not true of many indirect taxes. There is no clear articulated rationale for the current situation, and that risks undermining trust in the system.
3) Tax housing properly, in line with values
Housing taxation at the moment is damaging to productivity. Stamp duty discourages people from moving around the country to find work. Council tax is based on property values that are out of date by around a quarter of a century, and does not properly tax very high value properties. Paul Johnson likened to having lower VAT rates on Ferraris than on Minis.
4) Broaden the VAT base
We have many exemptions that mean that VAT is not paid on many products. We have the narrowest VAT base of many developed countries. It’s costly, and much of the benefit goes to those who spend the most – those on higher incomes.
More broadly, Paul also talked about the risks of the shrinking tax base, something the SMF has also worried about.
5) Work out what to do when fuel duty revenues run out
Fuel duties raise over £25 billion a year. But with cars becoming more fuel efficient and the need to reduce our dependence on petrol and diesel, we’ll need to find other ways of taxing road use.
6) Get a plan
For Government spending, we come up with plans and strategies. They may not be as long-term as we’d like, but at least there is pressure to come up with some kind of policy direction. This is missing from taxation. And that’s a particular problem given the long-term challenge. The OBR’s work on fiscal sustainability shows that with the cost of pensions and healthcare set to go up, we either need to increase the amount of tax we raise as a proportion of GDP, or accept that we can’t fund those extra costs.
Improving the tax system tends to create losers as well as winners, and therein lies the difficulty facing politicians. But with long-term pressures on public spending, tax is a side of the public finances that we can’t afford to ignore.
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Chalk + Talk is the SMF’s popular lunchtime seminar series, run in partnership with the ESRC. Chalk + Talk brings the best policy output from the world of academia into the heart of Westminster.
