Bright Blue, the independent think tank for liberal conservatism, has today published A vision for tax reform in the 2020s, setting out bold principles and policy ideas for an ambitious agenda of tax reform that tackle the leading economic, social and environmental challenges of the 2020s and beyond.
The Financial Secretary to the Treasury, Lucy Frazer QC MP, will this morning deliver a keynote speech at the launch event for Bright Blue’s new report, which concludes a major two-year project on tax reform influenced by Bright Blue’s high-profile cross-party, cross-sector Tax Commission.
The Government recently launched its Spring Statement Tax Plan, which has been described as the foundations of a future low tax economy. But Bright Blue believes the Chancellor can be and should be much more ambitious with tax reform during this Parliament.
Bright Blue proposes nine key principles that should underpin an ambitious programme of tax reform, supported by policy recommendations to achieve them:
- Supports effort, enterprise, and entrepreneurialism. Tax in the UK is increasingly falling on income from work rather than income from other activities. It should be an urgent priority to better reward people’s effort by reducing taxes on work, especially National Insurance and the Health and Social Care Levy.
Reducing the rate of the new HSCL and NI more generally, and broadening their scope to include other forms of income, would spread the impact of these taxes more evenly across the income and age distribution, reversing the troublesome shift of overall tax onto workers.
- Fairly taxes income derived from luck, rent-seeking, and externalities. Returns and profits do not always come from productive activities. Sometimes, they can arise from sheer luck, monopoly power or negative externalities. In many ways, the tax system does not adequately tax income derived from these sources. Indeed, if it did, it could lower taxes on effort, enterprise and entrepreneurialism in a more sustainable manner.
It is difficult to see why returns based merely on good fortune should attract a significantly lower tax rate, as they do in the UK through Capital Gains Tax (CGT). So the Treasury should aim to reduce the gap in headline tax rates between CGT and Income Tax.
The current design of Inheritance Tax also means that many life-enhancing transfers of wealth go untaxed. The Treasury should replace Inheritance Tax with a Lifetime Receipts Tax.
- Treat similar activities by individuals and institutions more equally. The current design of the tax system leaves individuals and institutions receiving the same amount of income paying vastly different effective tax rates, significantly distorting the economy.
Self-employed people pay considerably less in tax than workers, largely thanks to Employers NI, meaning businesses have an incentive to contract labour on a self-employed basis in order to minimise tax liabilities. The Treasury should aim to reduce the tax take between employees and the self-employed, initially by focusing on cutting employers’ NICs
Many of the largest online retailers are able to take advantage of profit-shifting to other jurisdictions overseas to reduce tax burdens, which gives them a tax advantage over bricks-and-mortar businesses. The UK should be at the forefront of global efforts to respond to profit-shifting and tax multinational enterprises more fairly and robustly. The UK should lobby internationally for the OECD’s proposed agreement on a 15% global minimum corporate tax to use a cash flow base.
- Incentivises investment to facilitate long-term economic growth. Investment from individuals and businesses is key to building a dynamic, productive and prosperous economy. The Government has recognised the role tax policy can play in spurring business investment through policies such as the ‘super-deduction’. However, the super-deduction is currently set to end in 2023, and the headline Corporation Tax rates are scheduled to rise, meaning that the UK has one of the least generous systems of capital allowances among OECD countries.The Treasury should move to a system of full immediate expensing of capital investment when the super-deduction expires in 2023.
Currently, a lower rate of Capital Gains Tax (CGT) exists to promote individual investment. But CGT chips away at the normal returns to investment by taxing gains arising only from inflation. It is only fair that, if the upsides of investments are rightly taxed more, more is done to mitigate against the potential downsides. So the Treasury ought to introduce inflation indexation, or a similar mechanism, for CGT that ensures the tax does not target ‘paper gains’.
- Ensures sound public finances. Simply borrowing more and more to meet today’s spending demands, and thereby ladening future generations with unsustainable levels of debt, is economically and morally unacceptable. A tax-reforming agenda needs to ensure that, overall, the UK’s fiscal trajectory is sustainable. Three important considerations should guide thinking about tax reform and fiscal sustainability: fixing the UK’s anaemic economic growth, borrowing to invest or cut taxes in the present, and cutting waste by ensuring value for money in both spending and tax reliefs.
Indeed, the UK Government could develop a consistent model for scrutinising tax reliefs. This could follow the German model, which legally mandates biannual reviews of corporate tax reliefs based on a standard evaluative framework including: target accuracy; cost-effectiveness; necessity; and, sustainability.
- Protects and enhances the livelihoods of the poorest. The escalating cost of living has made life miserable for many of those on the lowest incomes. The Government has taken action to blunt the impact of the new HSCL, but more can and should be done with tax to protect the poorest.
Council Tax disproportionately hits those in lower-value houses. The Government has introduced a rebate on Council Tax to mitigate against rising energy bills, but this is only a temporary measure. The Government should reform Council Tax to ensure it has an explicit link with today’s house prices. One radical option for doing this is moving to a Proportional Property Tax based on the value of people’s homes.
It is also vital and entirely feasible to pursue a just transition to net zero. That means those on low incomes do not bear burdensome costs. Following other countries such as Sweden, Norway and France, HM Treasury could create a ‘Green Dividend Framework’ for revenue derived from low-carbon economic activity and identify a specific portion of funds from it to be used to reduce the impact of rising prices on low-income households and vulnerable customers.
- Is easier to understand and more difficult to avoid. A needlessly complex tax system is hard to understand, reducing the transparency of taxes and the ability of politicians to explain what tax reforms are achieving. The tax system can be made easier for individuals and institutions to understand by ensuring that the design of taxes is more explicitly linked to their purpose and by simplifying reliefs.
Some taxes – particularly Inheritance Tax – are relatively easy to avoid: wealthier estates can take advantage of reliefs on Inheritance Tax, or avoid the tax entirely by passing on assets well before death. The Government ought to tighten eligibility for key Inheritance Tax reliefs such as Agricultural Property Relief or Business Property Relief.
- Supports the transition to a net zero economy. Achieving the UK’s legal commitment to net zero emissions by 2050 is the defining and transformative policy goal of this century. The tax system should play a role in supporting the UK’s net zero ambitions. The UK’s current carbon pricing across different economic sectors, however, is inconsistent and insufficient. If anything, certain sectors such as aviation and residential gas use receive a subsidy for carbon emissions.
A standard, economy-wide carbon tax is not feasible. However, the Government should set a target price range for carbon taxes across the whole economy to facilitate consistent carbon prices across different sectors.
- Helps to address regional imbalances, thereby levelling up the country. In some ways the tax system actively holds back progress on levelling up. Council Tax falls disproportionately on properties outside of London and the South East. While the British tax system is progressive overall, Council Tax is one of the only taxes that is outright regressive. Stamp Duty Land Tax also plays a part in slowing progress on levelling up by disincentivising moving home. It is time to replace Council Tax and Stamp Duty with a Proportional Property Tax based on the value of people’s homes.
Manufacturing businesses tend to be highly capital-intensive relative to service businesses, and so would stand to gain the most from better capital allowances and incentives to invest through the tax system. They also tend to be based in areas outside of London and the South-East, particularly contributing to jobs and output in the Midlands and the North. Business Rates, too, have a regional bias. As a result of infrequent revaluations that lag behind economic cycles, firms in areas with rising property prices can be caught out by sudden and substantial increases in their Business Rates liabilities. Conversely, businesses in areas with falling property prices can pay over the odds in Business Rates for years until the next revaluation.
The Government ought to move to a system of full immediate expensing of capital investment when the super-deduction expires in 2023 and it should ensure that Business Rates do not penalise investments in commercial property. This could be done by adopting a Business Land Tax levied on commercial landowners, based on unimproved land values.
Four previous Bright Blue papers have been published over the past year on different aspects of tax reform:
- Home truths: options for reforming residential property taxes in England
- Green money: a plan to reform UK carbon pricing‘
- Rightfully rewarded? Reforming taxes on work and wealth
- Energising enterprise: reforming business taxes
Ryan Shorthouse, Chief Executive at Bright Blue, commented:
“Reforms to taxation can be incredibly politically contentious. This causes conservatism in the way HM Treasury approaches tax as a policy lever, meaning it is under-utilised as a tool to help achieve positive, far-reaching change.
“The Government recently launched its Spring Statement Tax Plan. But we believe the Chancellor can be and should be much more ambitious with tax reform during this Parliament. The Chancellor’s Tax Plan should be added to: to not just always ideologically fixate on lowering taxes, and to also use tax as a tool to help a much wider set of economic, social and environmental goals. Ultimately, we believe that tax can achieve its potential as a substantial policy lever that facilitates bigger and bolder changes to our socioeconomic model than it does at present.”
The members of our Tax Reform Commission included:
- The Rt Hon David Gauke, Former Secretary of State for Justice
- The Rt Hon Sir Vince Cable, Former Secretary of State for Business
- The Rt Hon Lord Willetts, President of the Advisory Council and Intergenerational Centre at the Resolution Foundation
- The Rt Hon Dame Margaret Hodge MP, Former Chair of the Public Accounts Committee
- The Rt Hon Andrew Mitchell MP, Former Secretary of State for International Development
- James Timpson OBE DL, Chief Executive of the Timpson Group
- Luke Johnson, Entrepreneur and Chairman, Risk Capital Partners
- Emma Jones MBE, Entrepreneur and Founder, Enterprise Nation
- Mike Cherry OBE, National Chairman, Federation of Small Businesses
- Mike Clancy, General Secretary, Prospect trade union
- Victoria Todd, Head of the Low Incomes Tax Reform Group
- Sam Fankhauser, Professor, University of Oxford
- Christina Marriott, Interim Director of Policy and Advocacy, British Red Cross
- Helen Miller, Deputy Director and Head of the Tax Sector, Institute for Fiscal Studies
- Giles Wilkes, Former Special Adviser, Number 10 Downing Street
- Caron Bradshaw, CEO, Charity Finance Group
- Pesh Framjee, Global Head of Social Purpose and Non Profits, Crowe UK
- Robert Palmer, Director, Tax Justice UK
- The Rt Hon Lord Adebowale CBE, Chair, Social Enterprise UK
It is important to emphasise that members of the Commission, although influential in the development of the principles and policies, do not necessarily endorse all of them.
ENDS
Notes to editors:
- This report is part of Bright Blue’s project on tax reform, which is kindly supported by the Joffe Trust and Social Enterprise UK. However, Bright Blue retains complete editorial control over the report. The views in the report will not necessarily reflect the views of the sponsor.
- This report concludes the project advised by a high-profile cross-party, cross-sector commission established by Bright Blue to advise on reforms to the tax system in the years ahead to support the post-pandemic economic recovery, the restoration of the public finances, and the achievement of better economic, social, and environmental outcomes. Bright Blue has commissioned independent experts to provide original analysis and policy recommendations in four areas of tax policy: carbon taxation, property taxation, business taxation, and work and wealth taxation. The commissioners do not necessarily endorse the findings of this particular report.
