Why we need to have an honest debate about tax reform

Amidst the debates on whether taxes are too high or too low there is very little discussion on whether our tax system is well designed, yet it is here that much of the fairness – or lack thereof – and efficacy of the system is found.


Mike Buckley is the director of the Independent Commission on UK-EU Relations and a former Labour Party adviser 

Financial Times columnist Janan Ganesh wrote last week that it will be in the 2028 general election that Britain’s most deep seated challenges will be debated. In that year, he suggests, politicians will discuss the need for Whitehall reform, our relationship with Europe, the need for not only renewed infrastructure but the creation of a state that can deliver it without the overruns and chaos of HS2 and more.

To that list we might add tax reform. Amidst the debates on whether taxes are too high or too low there is very little discussion on whether our tax system is well designed, yet it is here that much of the fairness – or lack thereof – and efficacy of the system is found.Paul Johnson, director of thinktank the Institute for Fiscal Studies, argued last week that political parties are not being honest with the public about the need for trade offs following the election, whoever wins.He singled out NHS costs as the most egregious example, arguing that commitments to improve the NHS were essentially unfunded promises and that a “conspiracy of silence” meant neither main party had made any serious proposals to raise taxes.He accused both Labour and the Conservatives of having “failed to acknowledge some of the most important issues and choices to have faced us for a very long time. As the population ages, these choices will become harder, not easier. We cannot wish them away.”Both Wes Streeting and Rachel Reeves pushed back on Johnson’s comments. Reeves explained that she firmly believes she can restore growth to the economy, increasing tax revenues, spending and inward investment as a result.“There’s more to economic policy than tax and spend,” she said. “Growth is the missing ingredient. It’s been missing these last 14 years. And that I’m determined to turn around.”There is reason to believe Reeves. Economists acknowledge that reform to the planning system, as Labour proposes, will boost growth, albeit not by enough to meet spending needs.Foreign investment meanwhile has fallen off a cliff since Brexit – last year it was 31% below it’s 2016 peak. This harms growth because businesses struggle to invest, grow, produce more, hire more staff and pay higher wages. If Labour provide political and economic stability – sorely lacking for some time – that will do much to encourage investment. A state-backed approach to investment akin to Joe Biden’s Inflation Reduction Act – already copied by the EU – could bring more.Streeting argued that NHS reform starts with better use of the £170bn already spent on the health service, not extra billions for a system suffering from botched Tory reforms over 14 years.The UK already spends above the OECD average on health but spends less than the 14 wealthiest nations of the EU. Matching spending per head to Germany would lead to an additional £73bn (a 39% increase) of total health spending each year. Over the same period those 14 nations spent an average additional £33bn on capital investment in health care, a huge sum to make up but one which explains our crumbling health estate.Streeting is right to start by asking where the money is already going and how it can be better spent but is likely to find he needs more to bring health outcomes up to the western European average.But getting more tax revenue is not all about higher rates. We are all missing the link between tax reform, Government revenues and growth.Tax exists not just to create revenue but also to incentivise or discourage types of activity. A well formed tax policy can encourage investment, business growth or other kinds of economic activity. A badly formed policy can stifle investment, increase inequality and prevent the appropriate taxation of wealth or activity.To give one example, employment is more heavily taxed than other forms of income, particularly if paid via the PAYE system. National insurance, once linked to benefit entitlements, now functions as a second income tax which crucially is only attached to certain kinds of employment income. One consequence is to create a tax system in which employment is heavily penalised.Jeremy Hunt’s ambition to abolish national insurance as a Liz Truss-like gigantic, unfunded tax cut is clearly fanciful. But a consolidation of income taxes which recognised the continued risks borne by the self employed and company directors yet taxed all kinds of income more fairly, including reductions where appropriate, could bring in revenue and promote fairness.Housing taxes too could be reformed. Council tax bands have famously not been reviewed since 1991. Since then house prices have risen far more in London than in poorer regions. Reform could bring fairness and increased income for cash strapped councils.Stamp duty can create disincentives, for example to downsize or move for a new job, with consequences for housing availability and economic growth. A reformed tax could remove these obstacles.Carbon taxes are only growing in importance yet the range of policies that implicitly or explicitly tax carbon are poorly coordinated, meaning that different kinds of activity create wildly different carbon ‘prices’. Current policy produces uneven incentives to decarbonise. If action isn’t taken soon the cost of reaching net-zero is likely to be greater than it needs to be.Handled well tax reform could lead to social justice, taxing poorer households less and wealthier households more. It could lead to a more functional housing market, incentivising better use of available housing and economic growth by making it easier for people to move. It could incentivise and speed up the climate transition, the most urgent need of all.Ganesh concludes that Britain and its politicians are simply not ready to debate the bigger issues facing the nation. I disagree.Instead I think it more likely that politicians relitigating Brexit, talking tax reform or HS2 when over 8 million people are waiting for NHS treatment, 19,000 people waited for three full days before being seen in A&E in the last year, and the Truss-authored cost of living crisis has created such hardship, would be seen as incredibly out of touch.Everything is broken, from health, education, transport, housing, even our water and food security. The public want a government ready to restore stability to prices, to politics, to the economy and the NHS. That much is evident from polling not only on voting intention but also the relative priorities people place on different issues.The Tories are losing this election catastrophically for many reasons but one cuts across every demographic and region: they have failed to deliver on the very basics that make our country, our lives, work.The next government will be judged on delivery. As Streeting argues that means using available funds more wisely. As Reeves says a better Chancellor and government can impact growth, all else being equal. As Paul Johnson says difficult choices may still arise, necessitating one or more of cuts, appropriate tax rises or higher debt.Come 2028 the debate may be broad enough to cover tax reform as well as its rise or fall. As long as fairness lies at the heart of any reforms there will be an argument for that, should Labour wish to make it. 

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