In one of Rachel Reeves’s early speeches, following her appointment as Chancellor, she complained of the proliferation of different taxes, many of which have been added in the last 30 years. She claimed that many of these taxes either conflicted with or partly duplicated other taxes and that she intended to correct and simplify the tax regime as a priority.
So, one year in, how is she doing and is it time for Dear Rachel to decide on whether there might be some merit in abolishing one or more current UK taxes and perhaps, simplifying the entire tax regime?
Historical background
In a recent report by the Institute of Fiscal Studies (IFS), they compared the present tax regime with what has happened historically, with the starting point of the late 19th Century. The comparison revealed a number of intriguing facts, such as that in the last years of Queen Victoria’s reign direct taxes (Income Tax, Corporation Tax, NIC etc), represented only 5% of government revenues.
The bulk of government income then came partly from tariffs on imports and exports, such as tobacco and alcohol, but by far the biggest element of their tax income came from our then, large colonial empire, which unfortunately for Dear Rachel, is no longer available. This remained the case until WW1,
The Victorian fiscal house of cards was demolished, primarily by two successive world wars, with the direct tax figure hitting 25% by the late 1920s and 40% by the mid 1940’s. Since then, it has hovered around the 35 to 40% range and from an international perspective, we are relatively middle-of-the-road, higher than the USA or Australia but lower than most European countries, in particular France and Italy.
Current situation
It might surprise you to learn that Council Tax brings in more than all capital taxes (capital gains tax (CGT), inheritance tax and stamp duty) put together. Similarly, insurance premium tax exceeds inheritance tax. Also fuel duties beat the combined income from CGT, alcohol, tobacco and vehicle excise duties. I could provide more examples, but you get the picture.
If tax simplification is to be a major driving force of the Chancellor, then several of the “sin taxes” might be the first to go. For example, the soft drinks industry levy, aka sugar tax, brings in very modest amounts. You might argue that betting/gaming, tobacco and alcohol duties fit into a similar category, arguably alongside fuel and vehicle excise duties.
It is however worth remembering that the underlying purpose goes far beyond the raising of revenues. Some have suggested that they are also worth far more than the headline figure, by helping to relieve the burden on NHS and social services. On the other hand, they also fuel the black economy and by removing the benefits of tax evasion might lead to greater tax revenues from other sources. Bearing in mind that between them fuel, alcohol and tobacco bring in around 5% of all taxation, which is not to be sneezed at.
The Major League of tax raisers
(1) VAT: VAT brings in 16% of total government receipts and it is hard to imagine that anyone could think of a sensible way of replacing the lost revenues were it to abolished. Indeed, a bold Chancellor could potentially raise the VAT yield to around 20% by reforming it, as I wrote about on 31st July in my Blog ‘A roundup of the latest tax news’.
In the same Blog, I also raised the suggestion of reforming Capital Gains Tax and changing the rates to more closely mirror Income Tax rates, which would raise a significant amount and allow Dear Rachel much more flexibility in cutting some of the smaller tax raisers as well as simplifying the tax system as a whole.
(2) Income Tax: This is the biggy, raising over 30% of the total tax take and I therefore cannot see Dear Rachel doing anything drastic, except for perhaps, a little tinkering around the edges.
(3) NIC’s: The final Major League player I’m looking at today is National Insurance. Total NlC’s from employers and employees bring in almost 20% of the tax total and it’s therefore unlikely that NIC rates will be reduced any time soon, because of the huge amounts of income raised.
In addition, it’s worth noting that NIC is inexpensive to collect and is considerably more equitable than many of our other taxes. There has however, been a strong and persistent argument for abolishing employee NIC, as it no longer has any connection with the benefits system.
If employee NIC were to go, the obvious quid pro quo would be an increase in income tax rates, which the current government would be reluctant to do because of their ‘working people’ red line, but I would argue that right now, could be the moment to bite the bullet.
If Dear Rachel abolished employee NIC’s, currently 6%, and raised the starting rate of Income Tax to say 25%, she could argue that by combining the two, that she would not be breaking her red-line overall and could dress up the change as in effect, a !% tax cut.
If the two taxes were combined, it would not actually cost the Treasury any money because there would be efficiency savings by combining the two taxes and collection costs would drop significantly, largely achieved by a significant reduction in the number of HMRC staff.
Another factor to be considered is that such a change could well result in a major increase in the tax take from the over 65’s. This is because, even though this group are by far, the biggest recipient of NHS services, they do not pay any NIC’s. In recent years a growing number of them have continued to work past the state retirement age, plus of those who don’t, they will often have very generous pension income.
This would also give Dear Rachel the opportunity to effectively eliminate the grossly unfair situation of PAYE workers paying at least 6% higher rates of tax than those enjoying unearned income, say from property lettings.
Will it happen?
Most tax professionals do not expect any significant changes any time soon, as most of the existing taxes are either necessary or serve an ulterior purpose and cannot be eliminated, such as the tax on tobacco to discourage smoking.
However, there is no excuse for not simplifying the tax system, with many of the minor taxes costing almost as much to collect as they raise, thus they could be eliminated at modest or very little cost. A bold government would get rid of employee NIC’s as a start and then launch a wide-ranging review or possibly undertake a consultation about simplifying the wider tax system.
