Harry Fairhead from the TaxPayers’ Alliance sets out the four areas he thinks the Chancellor needs to sort out ahead of next week’s Budget.
Rumours abound of the Chancellor’s plans for the 2016 Budget.
At first we heard that tax relief on pension contributions might be limited to a single rate, then that the entire framework would be switched to an ISA-style system. Now, we hear that the 40p Income Tax threshold may head towards £50,000 and fuel tax will be bumped up to boost the Treasury’s coffers.
The relative merits of the rumoured plans aside, to me there are a few key areas that seem in most need of attention.
Corporation Tax
Corporation Tax, in the modern world, is not fit for purpose.
The ongoing saga over large US tech companies’ tax affairs shows how important reform is to restore some coherence and public trust to the system.
The Chancellor has previously tried to tighten things up with his diverted profits tax, the aim of which is to stop large multinationals doing business in the UK from hiding profits, but this is little more than a grand gesture to play to the gallery. The manner in which Facebook has voluntarily changed its structure shows how absurd the system has become.
Instead the Chancellor should be bold and simply replace Corporation Tax with a tax on income distributed from capital. Any time a company pays interest or a dividend, the recipient would be taxed. This would not be a blanket solution, but it would remove many of the discrepancies in the system, as well as being simple and easy to understand.
Stamp Duty
The second big tax change that the Chancellor could consider would be reform of Stamp Duty.
Although much improved since he got rid of the ‘slab’ system for residential property (remarkably still in place for commercial property), the effect of Stamp Duty is to gum up the housing market by reducing transactions.
For example, by making it expensive to downsize, large family houses may end up being occupied by elderly owners, when more efficient use could be made of it by a young family.
Similarly, the additional 3% rate on second homes restricts movement and can lead to the risk of collapsed deals.
If a homeowner buys their new home before he or she has sold their current property they must pay the additional rate as it is considered a second home. Yes, the additional Stamp Duty can be reclaimed once the original property has been sold, but if the purchaser doesn’t have enough capital to cover the extra costs the sale may fall through.
Help to Buy
Exorbitant house prices in part reflect poor demand-side policies.
Programmes such as Help to Buy only lead to inflated demand, rather than increased supply, and house prices rise correspondingly.
And, of course, some housing policies (like the Help to Buy ISA) come at very high cost to taxpayers, effectively charging them to make buying a home more expensive.
One clear solution is the liberalisation of the planning system to allow more house building.
Public spending
Help to Buy is (perhaps) symptomatic of the wider approach of just throwing more of taxpayers’ money at intransigent problems.
At the General Election there seemed to be a bidding war over the NHS, whereas an intelligent debate may actually involve asking why £115 billion is insufficient to cover the costs.
The subject of reform in the NHS is the subject of another (very long) article, but this approach can also be seen in IT procurement, the energy market and many other areas as well.
The end result is overspending, a budget deficit of £73.5 billion this year and a national debt of around £1.6 trillion.
However, salami slicing bits off various budgets is not the way to get spending under control. Instead a full review of what the Government should actually be spending taxpayers’ money on should be undertaken, and where judged wasteful or where the private sector can perform the same role, entire programmes should be axed.
Will George make my dreams come true?
So my Budget wish list would be to cut out the distortions in the tax system, to end programmes such as Help to Buy which artificially increase the cost of living for British families, and to get spending under control with meaningful reform.
The problem is that the status quo advantages some people at the expense of others. Those who may lose out are very aware of this but those who may gain are as yet unaware of the opportunities reform would offer.
Because of this, losers are much more vocal than potential winners and political pressure is very much one-sided, so I doubt much of this will happen. But hope springs eternal!
What do you think of Harry's wishlist? Share your thoughts in the Comments box below.
Harry Fairhead is a policy analyst for the TaxPayers’ Alliance.
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Budget 2016: date, predictions and rumours