The Institute for Fiscal Studies has called for VAT to be extended into financial services.
The five-year Mirrlees Review of the tax system, published today, suggests the current VAT-exemption creates immense complexities for financial services.
It says: “An equivalent to the VAT could, and should, be imposed on financial services. VAT should also be extended to nearly all spending. This would reduce complexity and costly distortions to consumption choices.
It claims extending VAT to services such as borrowing money and opening bank accounts would mean banks would not need to charge high interest rates on overdrafts and loans to recover funds, giving customers cheaper services.
The report says: “The money raised could be spent on cutting income taxes and raising benefits in a way which is broadly distributionally neutral and which protects work incentives.”
The report also proposes that income tax and National Insurance be merged as NI no longer “serves any purpose as a separate social insurance contribution linked to benefit receipt”.
IFS director Paul Johnson says: “There is little about the UK tax system which looks like it was deliberately designed. Successive governments have failed to set out a coherent strategy for tax. As a result the current set of taxes is complex and often incoherent and they impose a much greater cost on the economy than need be.”
Sir James Mirrlees says: “The Review shows that the UK system imposes unnecessary costs on the economy. It reduces employment and earnings more than it needs to. It discourages saving and investment, and distorts the form that they take.”