A matter of tax: pre-election briefing on the main parties’ tax policies

Published on Welfare & Tax Reform

There is much that is unusual about the 2017 general election, from its surprise announcement to the dominance of a single issue – Brexit – on which the parties themselves remain split. Particularly remarkable is the extent to which the tax debate has so far focused more on options for tax rises rather than tax cuts.

The backdrop for this debate is the multitude of tax policies delivered over the last seven years – a mix of tax rises, tax cuts and some limited tax reforms. These related in part to deficit reduction, but political determination to lower income and corporation taxes has also been key, with most tax increases funding tax cuts elsewhere.

Ahead of the 2015 election, all the major parties called for income tax cuts, despite the deficit. But two years on, the ground appears to have shifted. A smaller but still significant budget deficit remains, with elevated debt and looming demographic pressures sharpening the case for a continued focus on the public finances. There is evidence that public opinion has moved on too, and of course those earlier promises have reduced the scope for more tax cuts in the years to come. Add in continued uncertainty about the costs and opportunities that leaving the EU will present – and the altered focus of the tax debate appears understandable.

In this paper – part of our pre-election series – we look at the range of policies which have emerged in this pre-election campaign to date. Some of our analysis is necessarily speculative at this stage but a lot has already been revealed (not least through a full scale leak of the Labour manifesto).

We do not have to wait long for the manifestos of these three parties – or of the Green Party, SNP, Plaid and UKIP whom we have not covered. But it is to be hoped that the next five years will feature bold but considered tax reform. These must aim to support growth (by reducing negative distortions and making the tax system easier to use), improve the long-term sustainability of the public finances, and help low and middle income households especially.

Three challenges for the next five years stand out.

  • There is a pressing need to create a flatter tax playing field between different forms of labour, making the tax system fit for the 21st century world of work. Rising self-employment and incorporation are causing substantial, growing losses to the Exchequer. The Conservative policy of raising personal NI for the self-employed could now make a comeback, along with some new benefits for the self-employed. But even the previous proposals would only go part of the way to taxing all work equally.
  • The tax base has also faced erosion through an international decline in corporate taxes. Neither further cuts nor huge increases in the UK’s low headline rate seem sensible at present. But reforms to fight ‘base erosion and profit shifting’ – as the OECD calls it – remain necessary, at the same time as trying to boost the UK’s levels of business investment.
  • The UK’s housing market problems and wealth inequalities are not helped by its property taxes. Council tax (in England especially) is disproportional to property values and is still based on valuations from 1991 – a fact that will become yet more absurd if no action is taken in the next five years.[1] There are also real concerns that young people’s prospects for home ownership and savings will depend increasingly on their parents’ wealth. Reforming the taxation of domestic property, inheritance and pensions can play a role in averting this, but these issues have not yet made appearances in the 2017 election.