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Tax and the hissless pluck

The IPPR has suggested some simple and realistically costed changes to the UK tax system. In a rational society, these ideas ought to be relatively uncontentious.

13th Sep 2019
blue-eyed goose
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Jean-Baptiste Colbert reputedly said: "The art of taxation consists in so plucking the goose as to procure the largest quantity of feathers with the least possible amount of hissing". 

The Centre for Economic Justice at the Institute for Public Policy Research (IPPR) has had a good go at producing a hissless pluck in its latest work "Just Tax: reforming the taxation of income from wealth and work".

Tax gains as income

Their first suggestion is to bring capital gains into the calculation of income tax rather than keeping CGT as a separate tax.

As the IPPR put it, "income from wealth should be taxed the same as income from work." Why should we be taxed at one rate if someone pays us £100 for digging a ditch, and at a different and lower rate for sitting at home while someone pays us a £100 dividend on shares?

Indeed, we might consider the tax rate for profiting from doing practically nothing ought reasonably to be higher than for working. Who remembers Investment Income Surcharge from the seventies? Tax policy making has a very short memory.

The authors suggest this change might involve the inclusion of either an indexation allowance or a "rate of return" allowance based on bond yields, but they also model the impact of no inflation allowance for capital gains at all.

If you think about it, no one reduces your income tax rate to account for inflation when you get a cost of living pay rise. 

Abolish NIC

The IPPR proposes "a formula-based system for income tax, with a single, gradually-rising tax schedule which is applied to all sources of income regardless of origin."

What this appears to mean is the abolition of NICs and their replacement with a combined income-and-NICs tax. Given the conceptual leap of making Universal Credit claimants undertake tasks "in exchange for your benefits" the concept of "national insurance" has probably already been consigned to history.

The IPPR paper takes no account of the concept of contributory national insurance, but I suspect any realistic proposals to enact their recommended change might reignite this particular discussion.

Income tax rates

The IPPR paper includes some interesting modelling of the current cliff edges in tax rates (accepting for the moment the idea of NICs as a tax) that result from the different "units" of current taxation.

These cliff edges occur due to the different definitions of income and different thresholds for tax and NICs. The modelling looks at the proposals put forward in the last Labour and Lib Dem manifestos and their own ideas.  

The IPPR arguments have some merit, particularly as the impact seems to be positive for everyone except the very wealthiest and the "smoothing" of the rate of increase is much easier to explain.

Strengths and weaknesses

The strength of the IPPR paper is in their modelling of the financial results from the tax changes they propose. Who wouldn't want a relatively painless £143bn increase in the tax take?

The weakness is that they set out their data sources and the assumptions they have made, which is the correct approach. However, this makes it relatively easy to spot when those assumptions are actually built on straw.  

The HMRC data simply doesn't have the granularity necessary to model for every eventuality, including behavioural changes. I suspect this is also the case with the Treasury's own modelling.

Conclusion

On the whole, this IPPR paper is a good attempt at reconciling the desire for a larger tax take with the proviso that this doesn't mean one having to pay anything more oneself.

The proposals are sensible, achievable and costed, which should mean they are on any government's radar. They would also represent the most radical simplification of the tax system for years.

Are we taking bets on whether any government will adopt them?

Replies (4)

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By vstrad
16th Sep 2019 11:35

Sadly, M Colbert's maxim has long been forgotten by policy-makers. Instead, it now seems the norm to use taxation as a tool for social engineering. It's apparently perfectly alright to tax tobacco, alcohol, petrol etc. because these "sin taxes" are, we're told, only there to discourage us from doing things that are bad for us.
The vacuity of this argument can be seen if one imagines what would happen if, one morning, we all woke up and said, "You know what? The Government is right. I'm going to stop smoking, drinking, driving and flying immediately". The catastrophic loss of income would soon force the Government to find some other sins to tax us for.
Once the switch from internal combustion to electric propulsion have gathered significant traction, we can be sure that the hitherto saintly drivers of electric vehicles will find they are sinners and a target for taxation after all. What a nonsense!

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By itp33asso
16th Sep 2019 16:09

am I right in thinking you are a pheasant plucker? .....

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By itp33asso
16th Sep 2019 16:15

"Are we taking bets on whether any government will adopt them?"

Is the next pope Going to be Donald Trump?

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By itp33asso
16th Sep 2019 16:18

and finally… Is it "HIssing" down with rain where you are?

thankfully for you I seem to have exhausted my stock of puns for now....

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