The way we tax ourselves looks about to change. On Friday the Chartered Institute of Taxation , chaired by former tax minister Mel Stride introduced the
Launch of Treasury Committee inquiry into tax reform after the pandemic – Tax after Cornonavirus
The inquiry has a deadline of 28th August in its call for evidence by the Treasury on tax reform. There seems to be widespread public consent that something needs to be done on tax.
Stride gave an introduction to the reasons behind the Treasury’s inquiry.
- We’ve seen no fundamental reform since the late 1960s
- Taxation is vital to sorting the structural deficit caused by the pandemic
- The groups most impacted by pandemic aren’t best served by tax system
Stride went on to identify three areas where we change
- Change in terrain where taxes are applied – digitization means catching up with Amazons and Googles.
- Secondly the way people choose to structure their tax affairs.This involves how we choose to be employed but should also address the concentration of wealth in the hands of older people. Do younger people need a tax break?
- Thirdly the area of tax-reliefs. The five largest reliefs equal 10% of the total tax-take.
Stride said the big picture will be about green taxes, wealth taxes and redistribution of taxation.
The need for fundamental reform.
Angela Eagle saw a balance between growing the economy and the need to increase wealth taxes. She spoke about the importance of not getting lost in the weeds when we could be looking at the flowers.
She gave an example. The Chancellor has said that he is looking at national insurance for the self-employed. But is simply tinkering with an increasingly complex system (such as national insurance) the way forward, or do we need a more fundamental look at the way in which taxes and benefits interact.
It was good to hear the inquiry will be looking at the high marginal tax rates for those on universal credit looking to draw an income.
Stride pointed out that radical reform typically costs money. The money for reform inevitably comes back to the two big tax reliefs “the primary housing stock and pensions”.
While dealing with specific injustices
On the other hand, a tax (or tax-relief) can work even if it does not bring in a lot of money (or cost Government a lot).
The Digital Services Tax is a tax that underpins confidence in tax in the system that only collects £2-3bn in tax each year. This is chickenfeed compared with income tax, VAT and national insurance .
Similarly there are tax-reliefs which may not be hugely expensive to Government but which have a particularly negative impact on public confidence. An example might be the inexpensive to fix, but potentially fraught area of the incentivisation of low earners paying into pensions
It was particularly good to see Darren Philp’s question receiving a lot of support from others asking questions at this committee.
It was also good to see Margaret Snowden picking up on a related point.
The net pay issue was directly addressed by Sam Mitha at around 46 minutes of the inquiry. The Low income Tax Group ( a part of CIOT) has been driving this forward under the sponsorship of Ros Altmann. It was good to hear that this particular issue is now coming to the fore.
Specific injustices fuel the need for wider change.
Having listened to the launch and the comments of all the contributors, I was reassured that now we are likely to see something genuinely different coming out of the Treasury.
The pandemic is the great disruptor and now is the time for us to lift the bonnet on the variety of reliefs such as EIS, Entrepreneurs relief and the various opportunities for small businesses to claim tax credits for investment in technology,,
Similarly the issues highlighted by the Taylor report which have been addressed.
I hope the inquiry will also look at the hugely important issues around the funding of care – both residential and domestic.
And, as Jo Cumbo is reporting this morning, we have to look at whether the £38bn opportunity cost of pensions is actually working. That the Public Account Committee is alsoasking this specific question suggests that the writing is on the wall for the current pension taxation system.
The coronavirus pandemic has had a major effect on the UK economy and public finances, and when the economy recovers from the crisis, debt levels will be significantly higher than they were before. The UK will need a strong tax base to maintain the level of public services at sustainable rates of borrowing. The crisis has also brought to the fore issues such as whether the Government’s economic response to the pandemic should be reflected in changes to taxation.
The UK tax system has been largely unchanged for many years, whereas the 1960s, 1970s and 1980s saw a number of radical and far reaching reforms. But even before the crisis there were a number of pressures building up in the tax system which had already led to calls for reform. For example, demographic shifts are changing the tax base and demands for public services, and the growth of online- and data-driven employment and business models are eroding traditional sources of taxation and raising questions about the future of the tax system. The reconstruction of the economy after the unprecedented economic fallout of the coronavirus pandemic is an opportunity to reflect upon and address these issues.
The Committee is seeking evidence on:
o What are the major long-term pressures on the tax system in the UK, including those arising from changes in working practices, demographics, the environment and other factors? How are these affecting the efficiency of the tax base and the overall level of demand for public services?
o What more can the UK do to protect its tax base from erosion as a result of globalisation and technological change, and what further impacts will the coronavirus pandemic have on our tax base?
o Do these pressures need to be met with tax reform, and if so, is this the right time for reform?
o What overall level of taxation can the economy bear without undesirable or counterproductive harm to economic growth?
o Which areas of the tax system are most in need of reform, and which are best left alone?
o What reforms should be considered in response to the pressures on the tax system?
o What is the role of tax reliefs in rebuilding the economy and promoting economic growth and efficiency? Does the current regime of tax reliefs perform this role well?
o What are the areas for simplification?
o Is there a role for windfall taxes in the post coronavirus world?
o What is the right balance between taxation of work, savings/pensions and wealth?
o What is the best way to tackle tax reform, including what changes might be needed at HMRC to support implementation, and how should the Government consult with stakeholders and parliament?