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The UK tax system is inefficient, overly complex, frequently unfair, according to the final report from the Institute of Fiscal Studies’ (IFS) Mirrlees Review, which has repeated its demand for a radical overhaul.
Poor design contributes to an inefficient housing market, distorting of taxation of financial services, excessive reliance on debt finance, employment levels lower than they need to be, and inefficient savings and investment decisions, concludes the document, Tax by Design.
It suggests a long-term strategy for reform throughout the country’s set-up that includes the merging of income tax and National Insurance (NI), which the Mirrlees Review first mooted last November. Maintaining NI as a separate levy ‘serves only to create confusion and complexity’, it claims.
VAT is also targeted for an extreme makeover: an extension to most areas of spending, to reduce complexity and costly distortions to consumption choices. The additional revenue raised by such a move could be spent on cutting income taxes and raising benefits in a way that is ‘broadly distributionally [sic] neutral, and which protects work incentives’.
In what the IFS claims is the ‘deepest and most far-reaching analysis of the UK tax system in more than 30 years’, the Mirrlees Review criticises the different effective tax rates imposed on returns to varying forms of savings, resulting in poorly designed incentives or even disincentives.
There are also strong words aimed at corporate taxation for increasing the tendency towards reliance on debt. The report proposes that an allowance be introduced into the system to ensure equity-financed and debt-financed investments are treated equally across the board and only profits above the normal return to capital invested are taxed.
The leader of the review, Sir James Mirrlees, said the UK system could take a less costly approach while raising the same level of revenue and achieving as much redistribution as it does currently.
‘While some of the reforms we recommend involve tweaks to current policy others involve change, which is radical and is for the longer term. There is no getting away from the political difficulty associated with some of the proposed changes – but there is also no getting away from the enduring costs of failure to reform,’ added Sir James.
