Changing Tax: pressing reset on the UK’s tax policy

Published on Tax and Welfare

In this note, we consider how the Chancellor might reset the UK’s tax policy in the Autumn Statement, with a particular focus on the personal allowance threshold and corporation tax.

 

Deficit reduction has been a dominant economic policy goal since 2010. Tax receipts, despite being half the story of the public finances, have played a marginal role in achieving that goal‎ to date. Despite some large tax increases delivered in this period, very significant tax cuts have pulled in the opposite direction meaning that the bulk of fiscal consolidation has been achieved via spending cuts.

‎Significant and repeated cuts to income tax, corporation tax and fuel duty stand out as structural shifts that, combined, have been sufficient to stop the government meeting its fiscal targets. But it is not just tax receipt levels that matter, the shape of the tax base is also an important consideration from the perspective of both equity and public finance sustainability.

The erosion of significant elements of the tax take in recent years has been compensated for in part by ‎the introduction of a plethora of small taxes. Alongside the apparently indefinite delaying of default fuel duty rises, this has given a sense of an ad hoc approach to policy. There may be merit in diversifying away from the big three of income tax, NICs and VAT – and the new taxes may be desirable for other reasons – but there are potential trade-offs in terms of efficiency and equity which have been under-explored.

The UK tax base has also shifted over recent decades as a result of growing income inequality which, when combined with tax policy decisions, has increased reliance on a smaller group of taxpayers without sufficient discussion of the trade-offs involved.

  • ‎The new Chancellor has an important opportunity to rethink tax strategy in his first autumn Statement. He should:

1.given the changed circumstances, move away from further expensive plans to raise the personal allowance to £12,500 and the higher rate threshold to £50,000 by 2020 costing roughly £2bn at a time when the public finances are already facing a deterioration of £20bn annually by the end of the Parliament. Given that the gains from this policy flow overwhelmingly to the top half of the income distribution, it represents an expensive and poorly targeted measure.

2.drop plans for further cuts to corporation tax that are not necessary for the UK to maintain a highly competitive tax regime.