UK tax system is ‘costly and inequitable’, review finds

9 Nov 10
An independent review of the UK tax structure has condemned it as 'costly and inequitable' and recommended a package of reforms
By David Williams

10 November 2010

An independent review of the UK tax structure has condemned it as ‘costly and inequitable’ and recommended a package of reforms.

The Mirrlees Review, based at the Institute for Fiscal Studies, published Tax by design, its second and final volume of findings, this morning. The international panel of tax experts and researchers, chaired by Nobel laureate Sir James Mirrlees, designed a ‘good’ tax system, and contrasted it with the UK’s current arrangements.

The paper recommends abolishing National Insurance and replacing it with a progressive and coherently structured single income tax. It describes the existing taxes on earnings as ‘an opaque jumble of different effective rates’ that ‘reduce employment and earnings more than necessary’.

It also describes the existing marginal rate structure as ‘bizarre’, with rates of 40%, 50% and 60% for various top-rate income levels.

Similarly stinging criticism was meted out to Britain’s green taxes, which set ‘arbitrary and inconsistent prices on emissions from different sources’.

Council tax was described as ‘regressive without good reason’.

VAT exemptions, meanwhile, should be scrapped, it says. The UK has more exemptions and reductions in this area than most other countries, which is ‘expensive and highly inefficient’ and creates perverse incentives to, for instance, emit greenhouse gases through domestic fuel use.

The tax should be extended to cover ‘nearly all’ spending, Mirrlees argues, and the money raised re-distributed in the form of progressive income tax cuts.

The UK system also distorts behaviour ‘by treating similar activities differently without very good reason’, the review says.

Mirrlees said: ‘The UK system falls short of the ideal in costly and inequitable ways. It discourages saving and investment, and distorts the form they take. It fails to deal effectively with either greenhouse gas emissions or road congestion.

‘The revenue it raises, and the redistribution it does, could be achieved in less costly ways.’

However, Mirrlees did back the idea of a ‘universal credit’ benefits system resembling the one proposed by Work and Pensions Secretary Iain Duncan Smith.

Duncan Smith will launch his benefit shake-up tomorrow.

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