Repaying national debt - a taxing issue
Filed under: Financial Crisis, Taxes
All three major parties are now committed to the most economically damaging tax rises - on income and employment - through the 50p income tax rate and the increase in National Insurance Contributions (NICs), tax lobby group Refom has warned.In its report Reality check: Fixing the UK's tax system, the lobby group lays out why it thinks government and opposition parties have got it wrong and what they should do. It makes for interesting reading.
Reform makes a number of specific recommendations, based on what it thinks governments should and should not do.
VAT on everything
Do: Broaden the VAT base and scrap all zero and reduced rates. Reform says increasing revenue from VAT is preferable to increasing taxes on labour and to putting up the rate of VAT.It accepts that the poorest households would be most affected, so proposes increasing cash benefits by 7.5% so that the poorest would be better off. Reform reckons this would raise £15bn.
Scrap higher rates of tax
Do: Scrap the 50p income tax rate and reverse the restriction on higher rate relief. Reform says these measures are short-termist and politically motivated and will tip the balance of fairness in the tax system.They will, Reform claims, result in high effective marginal tax rates, reducing incentives to increase work effort. And they will make the UK a less attractive place for business and investment.
The freeze on the higher rate threshold should also be abandoned to avoid dragging an extra 70,000 people into the 40p bracket, it says. Reversing these policies would lose the Treasury up to £2.5bn, Refrom calculates.
Cut National Insurance
Do: Reduce National Insurance Contributions. The Government's planned increases in NICs will reduce incentives to participate in work or increase work effort, Reform claims. They will also increase the cost of employing workers at a time of high unemployment.Reducing employee and employer NICs by 0.5% while raising the primary threshold to £6,475 to align it with Reform's proposed income tax zero rate band would be a tax cut of £8.2bn, compared to the Government's tax rise of £6.9bn, Reform calculates.
New zero rate threshold
Do: Replace personal allowances with a zero rate threshold. Personal allowances reduce taxable income and so provide higher benefits to higher rate taxpayers, Refrom says.A zero rate threshold would cap the benefit received to the basic rate for all taxpayers, meaning relief can be provided to basic rate payers in a more efficient and cost effective way.
Including compensation for pensioners, this would raise additional revenue of £2.9bn keeping the current threshold of £6,475, Refrom says.
Bankers' bonuses
Do: Keep the bankers' bonus tax as a one-off measure. This is unlikely to change banks' "risky" behaviour but will, with such measures as the 50p rate, withdrawal of personal allowances over £100,000 and non-doms changes, drive financial institutions and workers out of the UK.Tax relief
Do: Scrap gimmick income tax reliefs and employee benefits. The system of employee benefits is highly convoluted. Many of the reliefs are based on outdated working practices and are ad hoc, rather than consistent, Reform says. Most could be abolished at an estimated saving of around £1.1bn.Marriage tax breaks
Do not: Recognise marriage in the tax system. This will not achieve the objective of halting the decline in marriage in the UK and is also inconsistent with the direction of travel of tax systems across the world, which are taking a more neutral approach, Reform says.A transferrable tax allowance has been costed at between £600m and £3.2bn depending on the design and would be money poorly spent, it argues.
Corporation tax
Do not: Introduce an early cut in the main rate of corporation tax. Surveys show that certainty and transparency is more important to businesses than low headline rates.The UK's corporation tax rates are competitive compared to other large economies. It is estimated that a reduction in the main rate from 28p to 25p would cost £1.2bn in 2011 and £2.5bn annually thereafter. Stability rather than tax cuts should be the priority for corporation tax, Reform insists.
