Britain’s tax system needs a complete overhaul so that it is focused on helping rather than hindering economic growth, reducing inequality and creating a level playing field.
That’s the conclusion of a report out this morning from the Resolution Foundstion think tank which says that the country needs better taxes, rather than just higher ones, to boost fairness and economic growth.
The tax system should,they say, aim to create a level playing field for taxpayers, preventing well-advised rich people using its complexity to reduce their bills.
Marginal tax rates range from 0% if you keep your income in a company and then emigrate, to over 80% for some working parents
The UK’s tax take is rising from 33 per cent of GDP in 2009-10 to 38 per cent by 2027-28 equivalent to a tax rise of £4,200 per household.
However this rising quantity of tax revenue has not been matched by a rising quality of tax policy and the country needs to move away from its simplistic and pernicious cycle of promising tax cuts while delivering tax rises, and towards reforming and improving our tax system so that it supports, rather than hinders, economic growth.
The report says that the Government is at least trying to support business investment with its welcome, if temporary, full expensing tax allowance. This should be made permanent, but wider changes are also needed, including making new structures and improvements exempt from business rates.
A second pro-growth tax priority should be to encourage dynamism by making it cheaper and easier for firms to grow and move premises, and for people to move jobs and homes. To do this, policy makers should reduce the transaction costs associated with these activities by cancelling the 2025 stamp duty rise, and halving stamp duty for main homes and non-residential properties, at a total cost of £5 billion.
These reforms can be paid for in part by reducing the UK’s high VAT registration threshold from £85,000 to £30,000 – a policy that is currently both expensive and acts as a disincentive for small firms to grow.
report says that the tax system has failed to respond to Britain’s four-decade wealth boom and needs major reform. One obvious example is inheritance tax, which has very high rates for the few people that actually pay it, and is too easily avoided by the super-wealthy and well-advised.
To address this, the complicated residence nil-rate band should be abolished, and banded rates of 20, 30 and 40 per cent introduced to make the tax more progressive. This should be accompanied by ending two other key reliefs – Agricultural Relief and Business Relief, the latter of which costs £800 million a year despite being used by just 3,000 estates.
This overall tax reform strategy would be revenue neutral – showing that higher taxes can also be better taxes that support economic growth and fairness, and that there is more to tax policy than promising cuts while loading extra taxes onto workers’ wages.
Adam Corlett, Principal Economist at the Resolution Foundation, said:
“The UK’s taxes have jumped up overall and are more likely to rise further than fall in future, despite the political rhetoric around cuts.
“But this rising quantity of tax revenue has not been matched by a rising quality of tax policy. There is no strategy behind a complicated system that sees some business owners pay no tax on their profits, while some families face marginal tax rates of over 80 per cent.
“Britain’s tax system needs a complete overhaul so that it is focused on helping rather than hindering economic growth, reducing inequality and creating a level playing field. These are basic principles that most taxpayers would expect, but that our current system frequently fails to deliver.”
