View from City Road: Politics prejudices reform of tax bias

The efficient movement of money from those who have it to lend to those who need it to invest is central to the operation of any capitalist economy. But it is hampered in Britain because returns on savings can be determined as much by the way they are taxed as by their underlying performance.

Some forms of saving, such as contributing to a pension scheme, receive tax concessions - an effective subsidy. Others are treated less favourably, for example bank and building society accounts. The Institute for Fiscal Studies, in a new report, argues that the barnacles of the tax system should be stripped away so that different types of savings are treated as far as possible in a neutral way.

The IFS recommends the creation of an Extended Personal Equity Plan (Expep) in which any financial asset could be held, and in which savings from taxed income would be exempt from any further taxation. On the same principle, the IFS argues that the cost of equity finance should be deductible from corporation tax in the same way as debt interest.

Removing biases from the tax system is almost always a worthwhile pursuit on economic grounds. Alas, the political gains are less clear; the beneficiaries of tax breaks can be vocal and powerful opponents when their subsidies are threatened.