The hugely complex UK tax code needs to be radically simplified by scrapping or replacing 20 taxes to eliminate harmful distortions, says the Institute of Economic Affairs
The latest briefing paper from the Institute of Economic Affairs, authored by Sam Collins and Alexander Hammond, suggests a radical simplification of the tax code as the five-year average tax burden in the UK is at a 70-year high.
The Chancellor will on Wednesday take to the despatch box against a backdrop of colossal national debt, the ongoing Coronavirus crisis, and the risks and opportunities of Brexit. The UK economy has just experienced its deepest recession in 300 years.
At over 10 million words, the UK tax code is not only the world’s longest – 48 times that of Hong Kong – but is packed with offsets, loopholes and distortions. The authors make the case for moving towards a tax system that has a low negative effect on welfare and efficiency, with small compliance and administration costs. It envisages a system that is non-discriminatory, avoids double taxation, and that is transparent and easy to understand.
The report, 20 Taxes to Scrap: How to grow the UK economy by simplifying the tax system, identifies a number of taxes that should be axed or significantly changed.
The Institute proposes abolishing or significantly changing inheritance tax, stamp duty land tax, both stamp duties on buying shares, the apprenticeship levy, the licence fee, vehicle excise duty, the bank surcharge and duties on alcohol, tobacco and gambling.
It also calls for an overhaul of property taxes, including council tax, the community infrastructure levy, business rates, affordable housing and other s106 obligations, and replacing the current fragmented taxes with a single land value tax. This would remove the current disincentives for property improvements and housebuilding.
In line with a coherent approach to environmental taxes, it would like to see the scrapping of air passenger duty, and wrapping it into the government’s general environmental policies and emissions trading scheme management. This could be achieved by introducing a single, non-distortionary, environmental taxation system – either through an emissions trading scheme or through a carbon tax – to replace environmental taxes such as the climate change levy or renewable obligations.
One of the more radical suggestions is to replace corporation tax and the diverted profit tax with a single income tax on capital income administered at the corporate level, similar to how PAYE works on wages. This would ensure neutrality between capital income and labour, eliminate the debt capital bias, and spur productivity growth, as returns on successful investments would no longer be penalised.
Alexander Hammond, policy analyst at the Institute of Economic Affairs, and co-author of the report, said: ‘A low and radically simplified tax system is the best way for our economy to recover from repeated lockdowns and prosper for decades to come. Given our newfound post-Brexit freedoms, now is the time for a brave Chancellor to embark on a radical tax-scrapping bonanza. The UK is in the unfortunate position of having many regressive taxes, and this paper suggests a number that could be among the first to go.’
Sam Collins, advisor to the director general at the Institute of Economic Affairs, and report co-author, said: ‘Retaining or increasing distortional taxes will be a block to the British economy growing and harm all of us in the long-term. Now is not the time to clamp down harder on people and businesses by raising tax. Now is the time to go for growth and reform our complex and outdated tax code.’
Institute of Economic Affairs report, 20 Taxes to Scrap: How to grow the UK economy by simplifying the tax system