Simon Shaw, a tax specialist at Matthew Arnold & Baldwin, says the Mirrlees review has set out plans for a good and fair tax system but wonders how much will be implemented
The Mirrlees review was a mammoth endeavour undertaken over five years by a panel of eminent economists and tax experts. It covered the gamut of UK taxation and produced recommendations to improve the efficiency and fairness of the UK tax system.
Summary of key proposals
Taxation of earnings
The review considered there are not enough incentives and the tax system is too confusing. Its proposals include a simplified, flatter-rate income tax structure and a merger of income tax and National Insurance contributions.
Concerns about pensioners have been well publicised. The proposal would be for a single benefit to replace all or most of the current multiplicity of benefits. The focus should be on incentives for 55-75-year-olds and parents with children at school, since they tend to be most responsive.
As far as possible, remove the 0 per cent VAT rate, reducing distortions to consumption choices. The extra income will result in income tax cuts and raised benefits. A tax similar to VAT should be applied to financial services.
Consistent price on carbon emissions through extending reach of the EU emissions trading scheme and a tax on other emission sources, including domestic gas. Replace fuel tax with national congestion charging.
Stamp duty is a badly designed tax which reduces mobility and council tax rates are based on very old information. The proposal is to abolish stamp duty and reform council tax so that payments are proportional to house value and are based on up-to-date valuations, dubbed “housing services tax”. This would act as a kind of VAT on housing.
Taxes on saving
Many forms of saving are currently discouraged. There should be no tax on “risk-free” or “normal” returns on savings on standard bank and building society accounts.
Returns on more risky assets should be taxed and returns on anything above the normal return should be taxed at same rate as income. There should be a reduced rate for dividends and capital gains on shares to reflect the fact that the underlying profits have already been subject to corporation tax.
A key aim is to stop wealthy individuals avoiding tax. There should be an allowance for corporate equity introduced into corporation tax. Generally, there should be no difference between the tax treatment of income from employment, self-employment or routing income through a company.
A good tax system
The review considered that a “good” tax system should be progressive and neutral. A key factor is that similar economic activities should be taxed in a similar way. This is the holy grail and theoretically should result in an effective end to tax planning.
A lot of tax planning is based on different rates within the system. The differences between income and capital gains tax, income tax on earnings and investment income and personal and corporate tax rates are key tools in the armoury of the tax planner.
Another issue is how certain transactions are taxed. There is recognition of the politics behind tax policy in seeking to encourage certain activities, such as saving for a pension, and discouraging other activities, such as smoking. This is very topical since the concept of a financial transaction tax is causing tremors in the City as we speak.
The review looks at the distinction between expenditure of a capital nature and expenditure of an income nature and the very different ways these are taxed. Capital investment and saving by individuals are generally not afforded tax relief. This creates no incentive to invest. The review considered that it would be beneficial to extend the relief currently given to pensions and capital allowances to other forms of saving and investment, such as the ones mentioned above.
Clearly, there would be limits but treating money saved or invested as deductible from income would have a significant impact on society. It might even give rise to new forms of tax-based investments. Similar systems exist overseas and provide annual relief known as the “rate of return allowances”.
The Mirrlees review recognises that all of this puts a case for treating pensions more generously by immediate tax reliefs, particularly since this will mean that any future drain on the state’s resources will be reduced because people will rely less on state pensions.
Will this change anything?
Some professionals might ask if this should change the advice they provide.
Taxes do change from year to year but infrequently in any significant way, although there are certain proposals we know are in the pipeline, such as the eventual merger of income tax and National Insurance. The changes proposed here seem unlikely to be introduced without significant coverage and consultation.
Many of the Mirrlees proposals make sense and could significantly benefit society but any proposals need to pass the gauntlet of politics and the media, so most seem unlikely to make that all-important jump from the pages of this review into the statute.