Tax reform is a moral issue


Paul Johnson – the head of the Institute for Fiscal Studies, not the former New Statesman editor – gave an overview of the Mirrlees Review on the UK tax system at a working lunch in the Institute of Economic Affairs this week. It's weighty stuff. Two volumes, the first comprising thirteen specially commissioned studies, the second trying to identify the character of a good tax system and a coherent strategy for reform. Well, good luck on that one.

Johnson explained that the tax system has to be understood as, indeed, a system. You don't want biases in it which favour, say, incorporation over partnerships. Nor do you want daft things like Income Tax and National Insurance being essentially the same tax, but levied at different rates on different income bands according to different rules.

You also need a coherent narrative on progressivity. The 0% VAT rate on food and children's clothes, for example, is a very inefficient way of helping poorer families, argues Johnson. Better to have just one, simple VAT rate and use the £25bn it brings in to cut income tax and encourage benefit-dependent households into work.

Then there is the issue of neutrality. Right now, says Johnson, we have a mass of non-neutralities. Different forms of saving, for example, are treated differently; debt finance for companies is favoured over equity finance; and the taxes (and subsidies!) on different fossil fuels are just bizarre.

So Johnson's plan is to align Income Tax and National Insurance, align the taxes on companies and profits, widen the VAT base, bringing in not just food but financial services and suchlike, reform property taxes (today's Council Tax is based on property values of 20 years ago), and cut and simplify taxes on savings. There should be, he says, a high hurdle to overcome before we adopt any further complexities – like all those little Brownian tax breaks in favour of Research and Development or the UK film industry for example.

A good start, maybe. But a rather techie approach. I always say the ideal should be to have a tax form that can be written in intelligible English and fit on one sheet of paper. That would certainly concentrate minds in terms of what taxes and tax complexities we really need. And we still need more of a vision, rather than a fixation on process. Some taxes – like any income tax on people below the minimum wage – are just plain wrong. Tax is taken by coercion, and we should want to minimise coercion. So let's get some of that moral thinking into the debate.