Tax review slams UK system

A review of the UK tax system claims that it imposes unnecessary costs on the economy, is overtly complex, and frequently unfair.

The Mirrles Review, by the Institute of Fiscal Studies (IFS) sets out a number of proposals that could increase output and welfare.

The IFS claims that poor tax design in the UK contributes to an inefficient housing market, distortionary taxation of financial services, excessive reliance on debt finance, employment levels lower than they need to be and inefficient savings and investment decisions.

Proposals set out in the review include a recommendation to scrap stamp duty on house purchases, and to reform council tax so that payments are based on up to date values and are fully proportional to house value.

The IFS also believes that income tax and national insurance should be properly integrated, claiming that national insurance no longer serves a purpose as a separate social insurance contribution linked to benefit receipt.

It is also recommended that VAT should be extended to nearly all spending, which would reduce complexity and costly distortions to buying decisions. While the taxation of savings needs a radical overhaul to encourage investing.

Summing up the findings Sir James Mirrlees said: “The Review shows that the UK system imposes unnecessary costs on the economy. It reduces employment and earnings more than it needs to. It discourages saving and investment, and distorts the form that they take. It favours corporate debt over equity finance. It fails to deal effectively with either greenhouse gas emissions or road congestion.

It could raise as much revenue and achieve as much redistribution as it currently does in far less costly ways. We propose a clear long-term vision and direction of reform. While some of the reforms we recommend involve tweaks to current policy others involve change which is radical and is for the longer term. There is no getting away from the political difficulty associated with some of the proposed changes. But there is also no getting away from the enduring costs of failure to reform.”

While Paul Johnson, director of the IFS said: “There is little about the UK tax system which looks like it was deliberately designed. Successive governments have failed to set out a coherent strategy for tax. As a result the current set of taxes is complex and often incoherent and they impose a much greater cost on the economy than need be.”