IFS report calls for 'VAT-like tax' on financial services and housing

9 November 2010 0:00 am | Updated: 9 November 2010 5:40 pm | By Steve Tolley

The Institute for Fiscal Studies is calling for a VAT-like tax to be applied to financial services and housing.

In the Mirrlees Review’s report, released this morning, the Institute for Fiscal Studies says it is hard to apply VAT to financial services and that stamp duty is inefficient but a tax “broadly equivalent to VAT” should and could be applied to both.

Also recommended by the report is the merging of income tax and national insurance to simplify taxation on earnings, and extending VAT to “nearly all spending” using the proceeds to cut income tax and raise benefits in a distributionally neutral way.

The report is wide ranging review of the UK’s tax system and suggests that it  should be designed as a whole in conjunction with the benefits system, avoid distorting people’s behaviour by treating similar activities differently without good reason and achieve progressivity as simply as possible.

Chairman of the review Sir James Mirrlees says: “We propose both a long-term vision of a better system and directions for reform. Some of the recommendations involve tweaks to current policy, others involve radical change.”

He adds: “It is undeniable that some of the proposed changes would be politically difficult, but failure to reform imposes enduring costs.”

The report claims the current structure discourages saving and investment and its reform could significantly improve the performance of the economy.

In a summary of the report it says: “Many forms of saving are discouraged at present and different forms of saving are treated very differently, distorting people’s decisions and creating complexity and avoidance opportunities.”

It recommends risk-free returns and those below the ‘normal’ rate be taken out of tax altogether with returns above that rate taxed as earned income with reductions for dividends and capital gains on shares to reflect corporation tax already paid.

It adds: “Equalising the marginal tax rates on earnings and different forms of capital in this way would reduce distortions between different economic activities and opportunities for avoidance.”

Mirrlees says: “The UK system falls short of the ideal in costly and inequitable ways. It favours corporate debt over equity finance. It fails to deal with either greenhouse gas emissions or road congestion. The revenue it raises, and the redistribution it does, could be achieved in less costly ways.”

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