Raising the most while doing the least damage: Robert Chote looks at some tax choices for the Chancellor in the Green Budget

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The Independent Online
If Kenneth Clarke decides on further action to reduce the Government's borrowing requirement in next month's Budget he will have to opt for higher taxes rather than public spending cuts, according to the Green Budget published yesterday by Goldman Sachs and the Institute for Fiscal Studies.

The Green Budget's warning that 'public spending targets for years beyond 1994-95 are already so low as to make it unlikely that they will be achieved' will come as a disappointment to Tory right-wingers.

It shifts the debate on to the choice between different types of tax increase - which will raise most revenue while doing least damage to the recovery, to inflation and to incentives for workers and companies?

Possible tax changes identified in the Green Budget include:

Income Tax

The March Budget included measures to raise an extra pounds 2.74bn from income tax by 1995-96, most of which have yet to take effect. But Mr Clarke may opt not to increase tax allowances and tax bands in line with inflation, which would raise an extra pounds 560m next year.

He might also restrict allowances - the income on which tax does not have to be paid - to the lowest 20 per cent rate of tax, so they are no longer worth more to the 19.6 million people who pay tax at the basic or higher rates. This would raise more than pounds 5bn and is consistent with the March change to the married couple's allowance. Some revenue could be handed back by moving more taxpayers from the basic to the lower rate band.

The Miras system means that mortgage-holders can offset interest payments against the income on which they have to pay tax, reducing the yield of income tax by pounds 4.3bn this year. This could be reduced, but the Chancellor may shy away because of the fragility of the housing market. Tax relief on pension contributions and profit- related pay could also be cut.

Excise duties

Petrol duties are already to be raised 3 per cent more than inflation. It would cost pounds 500m to offset the pressure on prices by failing to raise other excise duties in line with inflation. Over-indexing would raise revenue but fuel inflation.

Value-added tax

Raising the rate of VAT from 17.5 to 18.5 per cent would raise pounds 1.7bn next year and pounds 2.4bn a year thereafter. But extending the scope of VAT is more likely, although it would still put upward pressure on inflation. VAT on newspapers and books would raise pounds 1bn, on passenger transport pounds 2.3bn, on food pounds 7bn and on water and sewerage pounds 500m.

Extending VAT hits the poor harder than the rich because they are more likely to buy zero-rated goods, so some revenue would have to be used to compensate the less well-off as the Government has already promised to do for the extension of VAT to domestic fuel.

Taxes on companies

Some pounds 3bn could be raised by abolishing the tax refund on ordinary dividends paid to pension funds, although this would hit pension fund returns. This would help to eliminate the problem of surplus advance corporation tax, which critics argue creates a bias against overseas investment, encourages companies to move their research and administrative centres abroad and encourages wasteful acquisitions.

Companies pay ACT on all dividends, which they can generally credit against tax due on their profits. But overseas profits mean some companies pay more in dividends than they earn in UK profits, so they cannot claim a full refund.

Environmental taxes

Charging drivers to use certain roads could cut congestion and raise revenue. The Department of Transport has estimated that pounds 250m- pounds 700m could be raised by charging for motorway use.

Charging a pounds 5-a-tonne levy on disposal of waste in landfill sites could raise around pounds 650m, raising funds to deal with the environmental damage such sites cause.

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