In a policy paper published today, the think-tank criticised the current income tax system as incoherent, inefficient and in places regressive. It called for a single tax schedule, combining existing rates and allowances for national insurance and income tax, to be applied to all incomes on an annual basis.
This reformed system would have significant revenue-raising potential, the IPPR said. Modelling showed it could raise between £6bn-16bn extra while still increasing post-tax incomes for at least 75% of individual taxpayers.
The policy paper Tapering Over the Tax: Reforming taxation of income in the UK, said variable treatment of different sources of income “reduces the current system’s progressivity, creates perverse economic incentives and helps to create political opposition to tax rises”.
It highlighted the complexity incurred by two separate tax schedules for income tax and national insurance, and differing bands, thresholds, allowances and reliefs.
“Assessed against three simple principles of tax design – efficiency, progressivity and system coherence – the UK’s current system performs poorly,” the IPPR said.
For instance, the effective tax rate on annual earnings from employment above the tax-free allowance is 32%, but only 7.5% for income paid in dividends from company profits.
The current system also places a heavier burden on poorer households, the think-tank said. On average, the poorest 20% of households paid 35% of gross income in tax, far more than for other households.
Under the IPPR’s proposed reform, for most incomes the marginal tax rate would rise at a slow pace between a new tax-free allowance and a new threshold for the top marginal rate, depending on taxpayers’ exact income level.
The IPPR said: “A tax system designed in this way would be more progressive and more efficient, and would enable government to raise taxes more fairly and more easily if required.
“By improving work incentives for low earners, as well as the variable treatment of different sources of income, perverse economic incentives and deliberate tax avoidance would be reduced.”
