Observations

Tax increases: quality, not just quantity

Date: 17 June 2010
Authors:
Publisher: IFS

Now that the Office for Budget Responsibility has delivered its judgement that the structural hole in the public finances is slightly larger than Alistair Darling claimed in his final Budget in March, attention turns to how George Osborne might go about filling it in his first Budget next week.

The Coalition partners have agreed that the "main burden" of the fiscal repair job should fall upon public spending cuts. But this clearly leaves open the possibility that the Chancellor will choose to announce fresh tax increases on top of those left in the pipeline by Labour - not just to help bring down the deficit, but also to pay for the other tax cuts that the Coalition partners have agreed to deliver (such as increasing the income tax personal allowance).

Much attention will focus of the quantity of any such tax increases, but we should be just as concerned by their quality. Will they exacerbate the weaknesses of the current tax system or begin to eliminate them? And will the Coalition demonstrate a commitment to tax reform that goes beyond the design of any revenue raising measures? IFS researcher Paul Johnson has explored some of the "do's and don'ts" in a talk at the London School of Economics, which you can find here. It draws on lessons from the Mirrlees Review of the UK tax system, which is being carried out under the auspices of the IFS, of which Paul is one of the editors, and which is now being finalised for publication in the autumn.

Paul lists the main defects in the tax system that the Review has identified and argues that the Coalition should make its Budget decisions with a long-term vision for the reform of the tax system in mind. A guiding principle of the Review is that the tax system and much of the benefit system needs to be viewed as a whole when we think about how taxes influence people's behaviour (for good and ill) and how they redistribute resources within the population and across generations.

He previews a number of the Review's recommendations, among them:

  • Taking a consistent approach to the treatment of savings, when deciding how to tax income and capital gains.
  • Improving work incentives for lower income groups, mothers with older children and people around retirement age.
  • Simplifying the benefit system and integrating income tax and National Insurance.
  • Broadening the base of VAT, so that people can consume more of the goods and services they want for every pound they spend.
  • Reforming the taxation of housing, to make it fairer and more efficient.

More details of the Mirrlees Review can be found here.