Our tax system is an opaque, complex, unfair jumble, which is why no chancellor, including this one, has got the courage to seriously touch it
Go easy on George Osborne. All Budgets are botch jobs. Chancellors are at the mercy of interest group bullying, press hysteria, bond market whims and backbenchers contemplating electoral defeat. They cut taxes, make spending commitments and introduce new benefits to head off political trouble and get a day or two of favourable headlines.
Given a blank sheet of paper, only a lunatic would design a tax and benefit regime that remotely resembles the one we have. All reforms and alleged ‘simplifications’ make taxation and benefits more complex than before. For each tax loophole or anomaly that chancellors remove, they invariably create at least two new ones.
‘We are not bound,’ argues Paul Johnson, director of the Institute for Fiscal Studies, ‘to have a tax system as inefficient, complex, and unfair as our current one.’ But I fear we are. It is the price of democracy or, at least, of timid politicians. All chancellors know that any change in taxation and benefits involves winners and losers. The losers will be furious, and probably nurse their anger until the next election; the winners will be ungrateful and forgetful.
A few years back, the IFS asked distinguished thinkers, chaired by a Nobel Prize winner, Sir James Mirrlees, to deliberate on UK taxes. They concluded that, in almost every respect, the UK failed to meet the criteria for ‘a good tax system’. Its income tax was ‘an opaque jumble of different effective rates’. VAT, its main indirect tax, had numerous arbitrary exemptions, zero ratings and reduced ratings that compelled grown men and women to debate the difference between a cake and a biscuit. Instead of a ‘well-targeted tax on road congestion’, the UK had an ‘ill-targeted tax on fuel consumption’. Instead of ‘a lifetime wealth transfer tax’, it had an ‘ineffective inheritance tax’. Nobody in government paid the smallest heed to these admonitions.
All finance ministers struggle to tax income and liquid capital as it becomes ever more mobile. Land and property, however, cannot be hidden or moved offshore. They ought to be prime sources of revenue. Pitched at sufficient levels, they could prevent house price bubbles.
Yet we are stuck with stamp duty on house sales, the most economically counter-productive tax imaginable, since it penalises mobility; a council tax, based on outdated house values, that penalises those on modest incomes far more than the wealthy; and business rates, which penalise those who use land and buildings most productively.
Proposals for a ‘mansion tax’, set at an arbitrary level, rather than a properly progressive council tax, illustrate how political exigencies prevent a rational tax system. A mansion tax hits ‘fat cats’. It means, to most voters, a tax on somebody else and therefore presses all the right political buttons.
As for benefits and tax credits, they too are designed (if that is the right word) to meet temporary political needs.Think of the ‘bedroom tax’, intended to assuage public anger over benefit recipients occupying large properties, or the Osborne Budget’s childcare subsidy, assisting families earning £299,999 a year because child care is most vocally demanded by the middle-classes.
Iain Duncan Smith’s Universal Credit is meant to bring simplicity, justice and transparency to the benefits system. So it might, if the computers can cope. But then wait, as protests from losers grow, for future ministers to introduce complexity, opacity and injustice.
Benefits go to idlers, while the needy and deserving miss out, a Tory MP told me the other day. When I asked him to define the difference between the idlers and the deserving, he fell silent.
Taxes raise revenue, benefits help the poor. But they perform multiple other functions: influencing behaviour, managing the economy, placating the disaffected, securing political advantage. That is why we have an ‘inefficient, complex and unfair’ tax and benefit system and why, most likely, we always shall.
This article first appeared in the April edition of Public Finance
