We need a radical reform of the tax system

 

Share

The Conservatives want to fight the next election as the party of low taxes and fiscal rectitude. Labour, on the other hand, is determined to show it will safeguard public services, making “fairer” cuts that protect the vulnerable while tackling the “cost of living crisis” for those on middle incomes. David Axelrod’s appointment as senior Labour election strategist is a tactical coup for the party, but cannot be a distraction from resolving policy fundamentals.

In truth, both parties are conspiring to make implausible promises: the British political class is avoiding an honest debate about taxing and spending. The danger is that neither party will have the mandate to take tough decisions, yet it is vital that politicians open up a more serious conversation with the public about future choices. 

Despite the prospect of economic recovery, the 2010s will prove to be a “nasty” decade. The UK public  finances are in a mess. The central cause of the ballooning deficit is the collapse in tax revenues, the result of over-reliance since the 1980s on financial sector growth and a booming housing market. In a more volatile  globalised  economy, Britain lacks a resilient tax base; moreover, long-term trends are further eroding tax revenues. The Office for Budgetary Responsibility (OBR) reports that revenues from fuel duty, oil and gas and  tobacco are declining rapidly. George Osborne’s unfunded pre-election spending spree, raising ISA limits and reducing alcohol duty, will make the tax system even more precarious.

As a consequence, “non-protected” government departments –those other than health, schools and international development —will be slashed by more than a third up to 2020 on top of cuts already imposed, a scale of fiscal retrenchment widely regarded as undeliverable in Whitehall. This predicament could be avoided by imposing further reductions in the welfare budget, but that would mean penalising children and pensioners – a step too far for most voters. In the meantime, structural pressures on spending are rising exponentially.

Part of the answer, of course, lies in reprioritisation. Ending pension tax relief for high earners and increasing investment in the early years will boost female employment, widening the tax base and advancing social mobility. Redirecting benefits from the affluent over-65s towards a comprehensive social care system, as the IPPR think-tank recommends, is a rational prospective choice.

But reallocating spending won’t plug the gap on its own. Neither will economic growth: despite optimism about the UK’s recent upturn, the IMF warns that the world faces years of low growth, from which Britain is not immune. As such, it appears certain that after 2015, taxes will have to rise. The priority is to identify new sources of revenue, alongside radical reform of the tax system.

Frank Field, Labour’s former Minister for Welfare Reform,  recommends an earmarked 1 per cent  rise in national insurance contributions  to pay for health and care costs – an admirably bold proposal, but politically risky unless voters can be convinced that the money will be spent wisely. Restoring the 50p rate of tax might be good politics distributing the pain of the fiscal squeeze more equitably, but won’t raise sufficient revenue on its own. The UK needs comprehensive tax reform, not endless tinkering with income tax rates and allowances.

One way forward is set out in the landmark Mirrlees review for the Institute for Fiscal Studies, which recommends “taxing income from all sources equally”: applying the same tax rates to employment, property, dividends, inheritance, capital gains and so on. This has intuitive appeal, simplifying the tax system while strengthening equity. Progressives should focus on shifting the burden of tax from incomes to land values, unearned capital receipts, and property. Either way, the political parties’ reticence about taxing and spending is no longer sustainable.

Patrick Diamond, a former Downing Street adviser to Tony Blair and Gordon Brown, is  Lecturer in Public Policy at Queen Mary, University of London     

React Now

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

Reach Volunteering: Financial Trustee and Company Secretary

Voluntary Only - Expenses Reimbursed: Reach Volunteering: A trustee (company d...

Recruitment Genius: Senior Project Manager

£45000 - £65000 per annum: Recruitment Genius: This is a fantastic opportunity...

Recruitment Genius: Shopfitter

Negotiable: Recruitment Genius: This is an opportunity to join a successful an...

Recruitment Genius: Digital Sales Account Manager

£25000 - £30000 per annum: Recruitment Genius: A Digital Sales Account Manager...

Day In a Page

Read Next
Emily Thornberry  

Left-leaning patriots unite! Let's get straight about Ukip

Katy Guest
Gary Catona has worked with a number of high profile singers including Stevie Wonder, pictured  

High pitch: In search of the next Whitney

Simmy Richman
Mau Mau uprising: Kenyans still waiting for justice join class action over Britain's role in the emergency

Kenyans still waiting for justice over Mau Mau uprising

Thousands join class action over Britain's role in the emergency
Isis in Iraq: The trauma of the last six months has overwhelmed the remaining Christians in the country

The last Christians in Iraq

After 2,000 years, a community will try anything – including pretending to convert to Islam – to avoid losing everything, says Patrick Cockburn
Black Friday: Helpful discounts for Christmas shoppers, or cynical marketing by desperate retailers?

Helpful discounts for Christmas shoppers, or cynical marketing by desperate retailers?

Britain braced for Black Friday
Bill Cosby's persona goes from America's dad to date-rape drugs

From America's dad to date-rape drugs

Stories of Bill Cosby's alleged sexual assaults may have circulated widely in Hollywood, but they came as a shock to fans, says Rupert Cornwell
Clare Balding: 'Women's sport is kicking off at last'

Clare Balding: 'Women's sport is kicking off at last'

As fans flock to see England women's Wembley debut against Germany, the TV presenter on an exciting 'sea change'
Oh come, all ye multi-faithful: The Christmas jumper is in fashion, but should you wear your religion on your sleeve?

Oh come, all ye multi-faithful

The Christmas jumper is in fashion, but should you wear your religion on your sleeve?
Dr Charles Heatley: The GP off to do battle in the war against Ebola

The GP off to do battle in the war against Ebola

Dr Charles Heatley on joining the NHS volunteers' team bound for Sierra Leone
Flogging vlogging: First video bloggers conquered YouTube. Now they want us to buy their books

Flogging vlogging

First video bloggers conquered YouTube. Now they want us to buy their books
Saturday Night Live vs The Daily Show: US channels wage comedy star wars

Saturday Night Live vs The Daily Show

US channels wage comedy star wars
When is a wine made in Piedmont not a Piemonte wine? When EU rules make Italian vineyards invisible

When is a wine made in Piedmont not a Piemonte wine?

When EU rules make Italian vineyards invisible
Look what's mushrooming now! Meat-free recipes and food scandals help one growing sector

Look what's mushrooming now!

Meat-free recipes and food scandals help one growing sector
Neil Findlay is more a pink shrimp than a red firebrand

More a pink shrimp than a red firebrand

The vilification of the potential Scottish Labour leader Neil Findlay shows how one-note politics is today, says DJ Taylor
Bill Granger recipes: Tenderstem broccoli omelette; Fried eggs with Mexican-style tomato and chilli sauce; Pan-fried cavolo nero with soft-boiled egg

Oeuf quake

Bill Granger's cracking egg recipes
Terry Venables: Wayne Rooney is roaring again and the world knows that England are back

Terry Venables column

Wayne Rooney is roaring again and the world knows that England are back
Michael Calvin: Abject leadership is allowing football’s age-old sores to fester

Abject leadership is allowing football’s age-old sores to fester

Those at the top are allowing the same issues to go unchallenged, says Michael Calvin