It’s high time for a Royal Commission on tax
The UK tax system is a mess and in need of reform. This is perhaps the most uncontroversial sentence I have written since I began writing in these pages. The politics of tax has made even sensible reform to the levying of UK tax nigh on impossible - reform that almost all sides of the political spectrum agree would boost economic growth.
There is little doubt that tax complexity, as well as the perverse incentives and distortions of outdated or layered tax structures are an impediment to UK productivity. In significant pockets of the economy securing a better accountant is a more valuable endeavour than developing a better product. Yet short-term political considerations are proving formidable barriers to sensible reform. Tax has also become such an emotive issue - with the UK tax burden now approaching a 75-year high - that each general election the major parties set about trying to set tax traps for each other. This sucks the oxygen from sensible debate over tax reform.
As way of an example ahead of July’s General Election both major parties ruled out increasing any of the major UK taxes, namely Income Tax, VAT or National Insurance. In doing so - and therefore ruling out the taxes that raise almost two thirds of all tax revenue - this has triggered heightened speculation that other parts of the tax system including capital gains tax, inheritance tax, council tax, and taxes on the value of assets will see big increases. This approach has resulted in a chilling effect on economic activity in the run-in to the Budget on 30 October. Not only is this visible in recent data on consumer and business confidence which have both dropped back from multi-year highs, but retail banks are now reporting a seizure in activity amongst UK small and medium sized firms. Investment advisers have reported more than a billion pounds worth of share sales by company directors since the election amidst fears of a big rise in capital gains tax. The Alternative Investment Market (AIM) that provides growth capital for UK companies is trading like its days are numbered.
To give the Labour government their credit they haven’t directly fuelled any of the specific rumours on tax. These speculative stories have emerged by a process of elimination, allied to some of the politically motivated framing of the economic inheritance. This Parliament - absent a big external shock to the economy - looks set to involve a political muddling through on tax. But if the Labour Party aspire for a second term - or indeed any other political party is looking to govern coherently from 2029 - they should aspire for a better way of approaching tax next time out. That requires work right now. Work that should involve a Royal Commission on tax reform.
The good news is that so much of this work on sensible tax design has already been done. The Mirlees Review of 2010 stands the test of time. The original panel of reviewers included the late eponymous Chair, Sir James Mirlees, as well as my fellow Times columnist Paul Johnson. They have prepared much of ground on replacing fuel duty as transport systems electrify, on amalgamating Income Tax and National Insurance into a single payroll tax, on abolishing distortionary property taxes like Stamp Duty and replacing them with a land value tax. What is missing is putting this body of expert work on a statutory footing, as well as updating it with the challenges that have emerged over the last fourteen years. We have seen with the Dilnot Commission on Social Care funding what happens when expertise faces off to political calculation. The latter holds the whip hand on almost all occasions.
The advantages of a Royal Commission - and such a structure hasn’t been used since the 1999 Commission into Reform of the House of Lords - is that it elevates smart, evidence-based policy design above the cut and thrust of daily politics. As such it is important that such a Commission isn’t asked to opine on whether taxes are too high, or too low. This would drag any Commissioners, and their recommendations, into the political and ideological mud. That judgement should remain a party-political campaigning point. Too often this ferociously debated hinterland on whether the UK should have a larger of smaller state sector blocks any sensible reform moves.
Adding to the list of areas that any Royal Commission should investigate would be a broadening in the base for levying VAT, a levelling of the tax playing field between the physical and online business world, and establishing a price for carbon that balances the Net Zero agenda with the fact that carbon pricing does not exist in an international vacuum. Too much of the debate on tax fails to realise that people and capital are increasingly mobile and can choose their tax jurisdiction. A tax system fit for the future will surely realise that this is a trend that is only going to accelerate.
Current government thinking has recognised that long-term clarity on tax is important. The Chancellor has pledged a road map for business taxation at her upcoming Budget - fulfilling a pre-election pledge to do this within the first six months in office. But to avoid such a road map getting bogged down in political jousting there needs to be some effort at securing bipartisan agreement. Not least because the unifying feature of the four remaining Conservative leadership candidates is a desire for government to “do less”. Whilst I am full of scepticism of the underlying detail of such pledges you can see another tax ecocar crash coming at the next General Election if tax reform isn’t raised above the political fray. The prize for getting this right is a pickup in economic growth. Now that truly is a bipartisan goal.
