Use Budget to untangle tax jumble, IFS tells Osborne

6 Jul 15

Chancellor George Osborne has been urged to use this week’s Budget to introduce reforms to the UK’s “creaking and increasingly incoherent tax system” by the Institute for Fiscal Studies.

IFS director Paul Johnson stated that the Budget represents the new government’s best chance to make much-needed changes, including council tax revaluation.

However, Johnson added that the Conservative Party’s manifesto pledges do not set out a coherent plan for reform.

Indeed, the changes being indicated by ministers could actually exacerbate existing problems, he said. For example, going ahead with the plan to offer additional inheritance tax relief for owner-occupied housing would further damage and distort an already broken system of housing taxation, Johnson argued.

Osborne would also be limited by the Conservative election pledge to legislate to prevent an increase in income tax, National Insurance contributions and VAT, the IFS highlighted. Between them, these taxes account for more than two-thirds of all government revenue, creating “political handcuffs” that could stymie wider systemic reform.

Johnson therefore called on the chancellor to use Wednesday’s statement to set out a long-term plan for the management of the tax system to avoid frequent changes.

Businesses and individuals currently have little idea from one year to the next what will happen to their tax liabilities, Johnson observed. Examples from different governments included the introduction and subsequent abolition of a 10p income tax starting rate by the last Labour administration, and Osborne’s increases of the bank levy every six months.

“Chancellors cannot restrain themselves from layering complexity upon incoherence.” Johnson wrote. “So perhaps the most important thing Osborne could do next week is simply to commit to telling us broadly what he wants to do with the tax system. One route to long-term reform is set out in the Mirrlees Review published by the IFS in 2011. There are other routes to reform. The chancellor should lay out his own strategy.”

Such a plan would also address “growing challenges” such as an increasing dependence on a few very well-off taxpayers, the ability of both individuals and firms to move around the world more easily, and the growth of e-commerce, the IFS said.

“He should give us some sense of where he wants to take the taxation of pensions, the taxation of profits, the taxation of earnings, the taxation of housing and the taxation of inheritances,” Johnson added.

Specific reforms should include property revaluation for council tax, which is based on outdated 1991 values, and the integration of income tax and National Insurance.

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