Hamish McRae: So complicated, even the taxman can't cope

Economic Studies

Share

The Institute for Fiscal Studies (IFS) has achieved almost totemic status in matters fiscal in Britain. When people refer to it they usually preface it with the word "authoritative" or "independent".

It has provided the head of the watchdog over the Government's finances, as its former director Robert Chote is head of the Office for Budgetary Responsibility. Its judgement on the annual budget is regarded as the one against which everyone else calibrates their own assessment. And most recently, its view that the 50 per cent top tax rate raises, at best, very little money and, at worst, may actually cost the Government revenue, has made people sit up because everyone knows that the IFS is not playing silly politics but trying to make the best independent judgement.

Up to now, however, it has been analysing the fiscal world as it is, rather than as it might be. That has changed with the new Mirrlees Review of the British taxation system, the most thorough look for a generation at how we raise tax revenues.

It is not so much about how big government should be within the economy; rather it is about how to have a tax system that does not distort or harm the economy and yet raises whatever level of revenues our society chooses to collect.

The overall level of taxation in Britain seems to be pretty much set. For the past 30 years no government has been able to raise more than about 38 per cent of GDP in taxes. Every time a government tries, something happens – most probably a recession – and revenues fall back. The previous Labour government was not a high-taxation government, just a high-spending one.

Within any given level of taxation it is possible to do the job well or badly and other international comparisons of Britain, by for example the OECD, do not redound to our credit. We don't have a really bad taxation system, not as bad for example as the US, but it is not, by international standards, a good one either. Now, as the Mirrlees report demonstrates there are many ways in which it could be improved.

It is a big report and impossible to do justice to here, but a few points stand out. One is that we have a very complicated system; so complicated that the tax authorities themselves can't cope. Another is that having separate tax and national insurance schemes makes no sense. Others include the narrow and arbitrary scope of VAT, the nonsense of stamp duty, and the way in which company taxation encourages corporations and banks to raise debt capital rather than equity.

No tax system is optimal and what is appropriate and acceptable changes with time. My own view would be that right now two things really matter: certainty and simplicity. But in the medium-term Britain ought to aspire to a system that follows global good practice rather than one that's at best mediocre. I suppose the sooner we set that as a target the sooner we get there. Meanwhile, a thank you to the IFS.

The eurozone crisis turns really ugly

The eurozone nightmare continues but it is interesting, is it not, that even over a week the tone of the debate has shifted. A week ago it was not really possible for senior politicians in Europe to acknowledge that a Greek default was inevitable. Now the issue is much more whether it should be orderly or disorderly and how the subsequent mess can best be cleared up.

This is all moving so fast that it is hard to keep recalibrating what is happening. But a north/south split is becoming ever clearer. You can see that in the widening gap between the rates on German bonds and on Spanish and Italian bonds of the same maturity. But the thing that I find most interesting is not what is happening at the public level – what price Italy has to pay for its next tranche of debt – but what is happening under the radar.

For example, most German banks are being flooded with deposits because they are trusted, while Spanish banks and even French banks are finding that depositors are taking their money away. The banks, for their part, are cutting back on loans as they are uncertain of their ability to fund them. The situation is already quite ugly and will become more so.

Bank lending will be a casualty of Vickers

That leads to our own banking reconstruction, following the Vickers Report and the debate about it, which sadly has generated much more heat than light. So to try to shed a little light, consider this. There are two fundamental problems with re-regulating the banks, something that everyone accepts has to be done.

One is that it is not at all clear that retail banking, at least in Britain, is less risky than investment banking, notwithstanding the characterisation of the latter as "casino" banking. What brought down the Royal Bank of Scotland was a dreadful takeover, coupled with bad conventional lending. With HBOS it was bad property lending. In Northern Rock the same, coupled with relying too much on money-market funding.

The other is that a "safer" banking system will lend less money. It will be harder to get a mortgage; harder for businesses to raise loans; harder to get consumer credit.

Now that is probably what has to happen, and you can argue that the shift will be not be that great. But it may, and that of itself is a good argument for going cautiously.



h.mcrae@independent.co.uk

React Now

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

BI Manager - £50,000

£49000 - £55000 per annum + competitive: Progressive Recruitment: My client is...

BI Project Manager - £48,000 - £54,000 - Midlands

£48000 - £54000 per annum + Benefits package: Progressive Recruitment: My clie...

VB.Net Developer

£35000 - £45000 per annum + competitive: Progressive Recruitment: If you're pa...

SAP Business Consultant (SD, MM and FICO), £55,000, Wakefield

£45000 - £55000 per annum + competitive: Progressive Recruitment: SAP Business...

Day In a Page

Read Next
 

The law is too hard on sexting teenagers

Memphis Barker
 

Obama must speak out – Americans are worried no one is listening to them

David Usborne
Screwing your way to the top? Good for Lana Del Rey for helping kill that myth

Screwing your way to the top?

Good for Lana Del Rey for helping kill that myth, says Grace Dent
Will the young Britons fighting in Syria be allowed to return home and resume their lives?

Will Britons fighting in Syria be able to resume their lives?

Tony Blair's Terrorism Act 2006 has made it an offence to take part in military action abroad with a "political, ideological, religious or racial motive"
Beyoncé poses as Rosie the Riveter, the wartime poster girl who became a feminist pin-up

Beyoncé poses as Rosie the Riveter

The wartime poster girl became the ultimate American symbol of female empowerment
The quest to find the perfect pair of earphones: Are custom, 3D printed earbuds the solution?

The quest to find the perfect pair of earphones

Earphones don't fit properly, offer mediocre audio quality and can even be painful. So the quest to design the perfect pair is music to Seth Stevenson's ears
US Army's shooting star: Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform

Meet the US Army's shooting star

Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform
Climate change threatens to make the antarctic fur seal extinct

Take a good look while you can

How climate change could wipe out this seal
Should emergency hospital weddings be made easier for the terminally ill?

Farewell, my lovely

Should emergency hospital weddings be made easier?
Man Booker Prize 2014 longlist: Crowdfunded novel nominated for first time

Crowdfunded novel nominated for Booker Prize

Paul Kingsnorth's 'The Wake' is in contention for the prestigious award
Vladimir Putin employs a full-time food taster to ensure his meals aren't poisoned

Vladimir Putin employs a full-time food taster

John Walsh salutes those brave souls who have, throughout history, put their knives on the line
Tour de France effect brings Hollywood blockbusters to Yorkshire

Tour de France effect brings Hollywood blockbusters to Yorkshire

A $25m thriller starring Sam Worthington to be made in God's Own Country
Will The Minerva Project - the first 'elite' American university to be launched in a century - change the face of higher learning?

Will The Minerva Project change the face of higher learning?

The university has no lecture halls, no debating societies, no sports teams and no fraternities. Instead, the 33 students who have made the cut at Minerva, will travel the world and change the face of higher learning
The 10 best pedicure products

Feet treat: 10 best pedicure products

Bags packed and all prepped for holidays, but feet in a state? Get them flip-flop-ready with our pick of the items for a DIY treatment
Commonwealth Games 2014: Great Scots! Planes and pipers welcome in Glasgow's Games

Commonwealth Games 2014

Great Scots! Planes and pipers welcome in Glasgow's Games
Jack Pitt-Brooke: Manchester City and Patrick Vieira make the right stand on racism

Jack Pitt-Brooke

Manchester City and Patrick Vieira make the right stand on racism
How Terry Newton tragedy made iron men seek help to tackle their psychological demons

How Newton tragedy made iron men seek help to tackle their psychological demons

Over a hundred rugby league players have contacted clinic to deal with mental challenges of game