<<<	articles
A better way to tax Samuel Brittan Financial Times 13/09/06 It is still difficult to improve on the tax objective suggested by the French 17th century statesman Jean-Baptiste Colbert, to extract from the goose the maximum of feathers with the minimum of hissing. The typical UK taxpayer is aware of two or three salient items: how much he or she has to pay in tax and national insurance; the headline basic rate of income tax and council tax. Gordon Brown, the chancellor, has been able to take advantage by raising revenue from other items that attract less attention, for instance by not raising the thresholds at which both income tax and the higher surtax rates begin in line with incomes. Now, however, the goose has tumbled to the trick and the hissing is becoming louder. It is thus a good idea to examine the interaction of the tax system's different elements. The last such comprehensive review was undertaken for the Institute of Fiscal Studies by James Meade and reported in 1978. The IFS has now launched a new study under Sir James Mirrlees, who won his Nobel prize partly for rigorous studies of optimal taxation systems. No one expects the next government, whatever its complexion, to do more than cherry pick from its recommendations. But it will be useful to have a template against which to judge its actions. Meade's headline conclusion was to move from taxing income towards taxing expenditure. This has not happened in the purist way, which involves allowing citizens to deduct all net savings from taxable income. Direct taxation is a confusing mix of the income and expenditure principles and always will be. Meanwhile the Liberal Democrats have brought out comprehensive tax proposals. While that party's main attraction still lies in its greater commitment to personal freedom and due process than the Labour or Conservative megaliths, there is now at least a chance one might be able to vote for the party because of, rather than despite, its economic policies. The part likely to attract the odium of the Lib Dem left at next week's party conference is withdrawal of the earlier flagship proposal to raise the higher rate of income tax from 40 to 50 per cent. Nevertheless, Robert Chote, IFS director, regards the new proposals as more redistributive. The core idea is to abolish the 10p lower band and raise the standard and upper rate threshold. The basic rate would be cut by 2 percentage points and corporation tax by one point. The package would be financed partly by tightening up capital gains tax relief and pension contribution reliefs and by raising the anomalously low upper earnings limit of employee national insurance contributions. More interesting are the environmental taxes, expected to raise more than £8bn. Most of the measures would make for a healthier and cleaner environment even without bringing global warming into the reckoning. There is, however, a snag. The old commitment to replace council tax by local income tax remains. Indeed it is from this switch that the main redistributive element arises. Is it not time that this hoary chestnut were dropped? The main reason for the pledge to take two points off the basic income tax rate is to prevent local income tax from becoming too onerous. Even so, the combined tax would still be a hefty charge on marginal earnings, which is where the disincentive effects lie. A site value tax would be a far better way of providing local government with its own source of revenue. Admittedly this would take time and have to be phased in: the present commitment is just to substitute a site value tax for the business rate. But why not add an interim measure to make council tax less regressive by introducing more bands and raising some of the rates? Taken as a whole, the Lib Dem package is not Gladstone or John Stuart Mill. But it does mark an advance on anything the two major parties have suggested. It is worthwhile alone for the proposal, much canvassed but never yet acted upon, of splitting the Budget into a simple annual bill setting out the main rates and occasional bills on the tax structure, which could be discussed with experts and interested parties so that the many half-baked proposals could be spotted in time.
<<<	articles
Published on www.samuelbrittan.co.uk Contact - samuel dot brittan at ft dot com