Tax review recommends radical reform

In the deepest and most far reaching analysis of the UK tax system in more than 30 years, the Mirrlees Review puts the case for radical tax reform. It describes how the current system is inefficient, overly complex and frequently unfair and it sets out a range of proposals designed to increase output and welfare.

The report launched by the Institute of Fiscal Studies (IFS), shows that the Government, through the tax system, takes around £4 in every £10 earned in the economy. It says that it is not surprising that getting tax design wrong can be hugely costly, yet the level and quality of debate on tax policy is inadequate; there has rarely been any clear sense of direction from governments; and expensive and damaging mistakes have been all too common. 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.

"The review shows how national income and employment could be significantly increased through effective tax reform. A government focussed on growth cannot afford to ignore some of the fundamental reforms required to the tax system. That does not mean small gimmicks and one-off allowances; it means a long term, considered and systematic approach to tax policy. This is an approach which has been sadly lacking for many years."

Conclusions

The conclusions of the report include:

• Income tax and National Insurance should be properly integrated. National Insurance no longer serves any purpose as a separate social insurance contribution linked to benefit receipt. Maintaining it as a separate tax serves only to create confusion and complexity.
  
• VAT is needlessly complex and inefficient because it treats different types of spending inconsistently.
  
• The taxation of housing is a mess. Council tax is still based on 1991 valuations and is unnecessarily regressive. Stamp duty is among the most inefficient and damaging of all taxes and renting is needlessly penalised by the tax system.
  
• The benefit system is unnecessarily complex, is not integrated, and reduces incentives to work and earn much more than is necessary.
  
• Environmental taxes impose arbitrary and inconsistent prices on carbon emissions from different sources. Some emissions are effectively subsidised by the tax system.
  
• Taxation of petrol and diesel is ineffective for tackling congestion.
  
• The taxation of savings needs a radical overhaul.
  
• The corporate tax system favours debt finance over equity finance, increasing the tendency towards an excess reliance on debt.

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."