ASI Executive Director Sam Bowman said:
Britain’s property market is completely broken, and the tax system is part of the reason why. There are three big problems that need to be addressed:
1) Replace business rates and council tax with a land value tax that funds local government directly. Rates and council tax are taxes on property values, so they penalise businesses and homeowners who invest in their buildings, and in most parts of the country they charge massively more for commercial use than for residential use. What’s more, even though these taxes mostly end up being paid for by landlords in the form of lowered rents it doesn’t feel that way to businesses, who fiercely resist the revaluations that are necessary to make the tax fair. We should replace business rates and council tax with a tax levied on the landowners directly for the value of the land, not the buildings on top, and commit to frequent revaluations that avoid large changes like the ones that many businesses are now facing. Ultimately we should aim to eliminate the distinction between residential and commercial use, though this would take time to avoid large rises in residential property taxes.
2) Scrap stamp duty land tax altogether. Stamp duty is probably the worst tax we have, and raises comparatively little money for the Exchequer compared to the damage it causes. For many people stamp duty is the largest tax bill they’re ever faced with, and it gums up the housing market by giving people a big disincentive to moving house – keeping older people stuck in large homes that younger families need, and preventing people looking for work from moving to more prosperous parts of the country.
3) Give housing benefit recipients and council home occupants control over their lives. Housing benefit is a huge problem because it effectively forces recipients to spend large amounts of money on housing that might be better spent on food, clothes, heating or other necessities if they could move to a cheaper home and keep the difference. We need to de-hypothecate housing benefit from housing and turn it into a simple cash payment, hopefully freeing up some more valuable housing stock and giving people more control over the priorities in their own lives. Similarly, social housing should be sold off with the proceeds used to pay for more generous cash payments and targeted tax cuts for people at the bottom of society.
ASI Head of Projects Sam Dumitriu said:
The overall tax system is flawed in a similar way, riddled with exemptions and distortions that mean it imposes a much large economic burden than necessary for the amount raised.
1) Scrap complicated, irrational and wasteful VAT exemptions. Use the money to help people on low incomes by lowering the Universal Credit taper rate and cutting National Insurance Contributions. VAT Exemptions and zero ratings are designed to make essential goods affordable for people on low incomes, but they frequently defy logic and perversely reward the rich. Defining essentials and luxuries is a fool's errand and has lead to lengthy court battles about cakes and biscuits. When they work as designed they're woefully inefficient. Take kids clothes: zero-rating gives a single parent buying a £5 pair of school shoes a £1 tax cut, while those with more money than sense get a £40 tax cut on £200 Dolce and Gabbana kids shoes. Defining essentials and luxuries is a fool's errand, like the case where McVities produced a giant Jaffa Cake to prove that they were cakes, not biscuits, and indeed zero-rated.
Better to scrap them altogether. That'd raise over £30bn, we could use that money to fund a big cut in the Universal Credit taper rate (63 to 50) so that work always pays and cut taxes that hit the poorest hardest like National Insurance.
2) Abolish Corporation Tax and replace it with a Border-Adjusted Business Cashflow Tax to boost investment, growth and wages, and eliminate tax avoidance. If Britain is to thrive outside the European Union, we should aim to have the most investment-friendly tax code in the world. Our relatively low Corporate Tax rate has helped draw in investment from McDonald's, Facebook and Snapchat. But we can go further. Corporation tax deters investment, lowers wages and is frustratingly easy to avoid. Let's follow the lead of Republicans in the US and move to border-adjusted business cash flow tax that only levies taxes on sales made to the UK.
There’s three parts to this. First, it would tax all sales made in the UK just like VAT. Second, it would have an unlimited exemption for capital investment guaranteeing that future consumption wouldn’t be hit. Third, it would fully exempt all wages from tax making it progressive (counteracting Employer NICs that fall heaviest on low and middle earners).
3) Ditch complex green taxes, wasteful subsidises for renewables and costly environmental regulations. Replace them with a simple carbon price and use the extra revenue to raise the National Insurance threshold to £11,500 and cut contribution rates. Britain tries to tackle climate change with a myriad of green taxes, numerous subsidies for renewable energy and a thicket of regulations. This amounts to central government trying (and in many cases failing) to pick winners. This imposes large costs on consumers and creates an uncertain climate for business investment.
There's a better way. Impose a simple, uniform, revenue-neutral carbon tax and let free enterprise, not big government, find the best solution to reducing carbon emissions. We should use the extra revenue raised to cut the taxes that hit the poor hardest. Lifting millions out of National Insurance Contributions and cutting rates.