20 November 2023

A simpler way to reduce the tax burden


The UK’s tax system is too complicated. It’s a point made many times before, yet ahead of the Autumn Statement, it is worth repeating. If there’s one great failure of the Conservative governments of the past 13 years, it’s this – the missed opportunity to establish a lower, simpler, more efficient tax code.

This week, the TaxPayers’ Alliance released an update to the Single Income Tax, our proposal to fundamentally reform Britain’s tax system and replace a complex swathe of direct taxes with a single tax on all income charged at a flat rate of 30%. There would still be a personal allowance, at £14,000, and a reduced number of indirect taxes. But corporation tax, income tax, national insurance and capital gains tax would all be abolished and replaced with this new single income tax. Road pricing would replace low emission zones, fuel duty and congestion charges. Vehicle excise duty, stamp duty and air passenger duty would be jettisoned entirely.

This radical overhaul would dramatically shrink both the incentive and the opportunity to avoid tax, putting the brakes on the relentless growth of the tax compliance industry over the past few decades – a true win-win scenario. The impact would be so stark on the world stage that it would see the UK climb the Tax Foundation’s much-heralded International Tax Competitiveness Index to a respectable 5th place – a drastic improvement from our current dismal position at number 30.

When the single income tax was first proposed, there would have been no need for dramatic reductions in government spending. In 2010, receipts stood at around 37% of GDP – hardly a million miles away from the single income tax goal of 33%. But while the overall share wouldn’t be drastically different, the burden would be much lighter, due to the huge simplification. By expanding the economy, total receipts could stay the same or even grow over the longer term, even if as a share of GDP they fell.

It’s not quite as easy now, frustratingly. With receipts now at 41% of GDP and the tax burden forecast next year to soar to a 75 year high of over 37%, bringing it down to 33% of GDP will be more difficult. Tough decisions would need to be made on spending, and with interest rates no longer virtually zero-rated, any policy change that added to the national debt would be fraught with risk.

Yet there are still things that can be done to point us in the right direction. One change, already partially made, is to align national insurance with income tax. Hypothecation, in which national insurance revenue is supposedly reserved for health and social care, is largely a myth, and it doesn’t make sense to have different bands for income tax and (employee) national insurance. Indeed, both now start at the same level of £12,570. High inflation has seen this threshold act as a stealth tax, which is in itself a good reason to raise the personal allowance to £14,000. According to our dynamic tax model, this sensible change, alongside eight other transitional measures (such as cutting corporation tax down to 15%, raising the inheritance tax threshold to £1m and stamp duty to £925,000), would result in GDP being £203bn higher after ten years. If the government wants to make decisions for the long-term then this is the place to start.

Almost all Conservative MPs could tell you a tax they particularly detest. Those with an airport in their constituency will point to air passenger duty. Those in southeastern constituencies don’t like the impact of inheritance tax. All seem to hate fuel duty. Some want different types of activities to be prioritised over others, with the tax system set up to incentivise those choices. This simply fuels a pork barrel style of politics, where the incentive is to fight for whichever tax change will most benefit an MP’s constituents, rather than the country as a whole.

A single income tax resolves this issue. All income, however it is earned, is taxed to the same degree above a certain threshold. There would still be VAT. Certain taxes to deal with serious negative externalities would likely stay as well. But this is a system that would unlock growth and ease the burden on everyone, partly through lower bills but mainly through sharpened incentives and simpler administration, all of which requires resolve when it comes to spending restraint. The Autumn Statement is a chance for the government to recalibrate our trajectory towards a more prosperous, less burdensome future.

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John O'Connell is chief executive of the Taxpayers' Alliance

Columns are the author's own opinion and do not necessarily reflect the views of CapX.