Ahead of the Budget next week, here are the key reforms and tax cuts we hope to see the Chancellor announce:
Scrap stamp duty on shares to boost investment
Stamp duty on shares may be one of the most harmful taxes we have despite raising relatively little money (£2.9bn in 2014-15). By making it costly for people to sell their shares, stamp duty interferes with price signals and raises the costs of investing overall. That hurts both savers and businesses’ access to investment financing. Scrapping it would be a cheap way of making stock markets direct money where it will be used best, give a boost to businesses in need of investment – and cement the City’s status as the world’s financial capital.
Pensions tax relief should be left alone
Abolishing the upper rate of pensions tax relief sounds like an easy way to save money, but it would be a huge mistake. Upper rate relief exists to help people smooth their incomes if they will only be in the upper tax bracket for a small part of their lives. Because people are taxed on pension withdrawals, abolishing upper rate relief would introduce double taxation to the system: people in the upper tax rate would be taxed for putting money in to a pension and again when they take money out of it. This would discourage some people from saving for their retirement and unfairly penalize the ones that do.
Alcohol duties should be merged into a simple alcohol tax
The alcohol duty system is amazingly complicated and confused, with entirely different rates per unit of alcohol for wine, beer, spirits, cider and sparkling wine, and strange kinks in the system that, for example, favour strong wines and ciders over weaker ones. This whole system should be replaced with a simple, flat per-unit tax on alcohol (as currently applies to spirits). That would stop the preferential treatment for selected drinks, like cider, and end the preferential treatment for stronger drinks. It might also make life a bit easier for Britain’s growing craft alcohol industry.
Phase out Housing Benefit altogether
Housing benefit should be phased out and eventually scrapped. In a property market where supply is tightly constrained, increases in housing benefit go mainly into higher rents. The empirical evidence suggests that about 70p of every £1 of the £26bn system goes into the pockets of landlords in the form of higher rents. Much of this benefit comes from renters who don’t even get the benefit, who are competed out. What’s more, the system encourages people with less means to move to the most expensive areas, since the level of payment is tied to prevailing rents, which means that the bill is artificially inflated. The government should use the money to supplement low incomes, by raising the employee NIC threshold and making the Universal Credit withdrawal rate less steep, so work pays more for UC recipients.
Stop business rates from taxing capital
Because business rates tax property values, they effectively tax both the land a property is built on, and the value of the bricks, mortar and some machinery on top of that land. Taxing land values is a relatively good way of raising revenue, because it does not discourage production. But taxing property discourages construction, improvements and investments in new machinery. The government should not exempt new machinery from business rates, as it is rumoured to be considering. This would add even more complexity to the system and increase compliance costs. And why should machinery, but not other improvements such as redecoration or refitting, be exempt? Instead, it should reform business rates so that they are based only on the unimproved value of the land the property sits on – and there is no reason not to improve the property itself.