Nobody likes tax increases but whoever wins the next election will have to raise taxes if they are to have any credibility in tackling the massive government deficit of around £200 billion and fend off a run on the pound.
While the Conservatives have said they would not be able to repeal the 50% tax on those with incomes of more than £150,000 a year, nor the increase in employer’s National Insurance contributions, they might do well to listen to some of the proposals from the Reform think tank – a breath of fresh air when it comes to tax changes.
While the Sunday Telegraph is reporting discussions amongst civil servants about imposing VAT on food, there is little doubt that this would be an enormously controversial and damaging move for any party that decided to impose such a tax increase. And although some of the Reform think tanks proposals have considerable merit, not everything it proposes makes sense, although it is much nearer the mark than anything so far proposed by any of the parties.
The Reform report points out that, ‘all three major parties are now committed to the most economically damaging tax rises - on income and employment - through the 50p income tax rate and the increase in National Insurance Contributions.’ There is no doubt that this is true.
Reform wants the VAT tax base widened and all exemptions removed which would allow the government to ditch the planned increase in employers’ National Insurance contributions, along with the 50p tax rate.
‘Tax rises are a necessity given the state of the public finances,’ said Andrew Haldenby, director of Reform. ‘But job-killing taxes on employment and growth are the worst possible way to go about it. If politicians can find the courage to eliminate the zero rate exemptions in VAT, they can actually cut taxes on jobs while still reducing the deficit.’
Reform maintains that widening the VAT base would, ‘mean extra taxes of £12 billion in the UK, or around £500 per family per year,’ it said. Reform wants to see all zero and reduced rates scrapped. ‘Increasing revenue from VAT is preferable to increasing taxes on labour - and to putting up the rate of VAT. The freeze on the higher rate threshold should also be abandoned to avoid dragging an extra 70,000 people into the 40p bracket,’ says the report.
Reform points out that the UK's VAT exemptions are out of line with other countries, and wants to see the full rate imposed on food, the construction of new homes, children's clothes and electricity and gas, which it said would raise £15 billion.
True – but few would agree with removing the VAT exemption on food and children’s clothing as this hits low income families hard. As Justin King, chief executive of Sainsbury’s put it, this would be, ‘a tax on living.’
Maintaining the exemptions but increasing VAT to 20% raises around £12 billion and doesn’t affect poor families who spend most of their disposable income on food and household bills. This would be a much more acceptable alternative since it would be a voluntary tax in that people don’t have to buy new HiFis and TVs.
But Haldenby is spot on when he says, ‘raising taxes on jobs, through higher National Insurance contributions, is astonishing given a rise in unemployment of 22% in the last year.’ He criticised the Conservative’s proposals too saying, ‘a tax bonus for married couples would be a new form of middle-class welfare without solving the problem of family breakdown.’
Transferable tax allowances between husband and wife, ‘will not achieve the objective of halting the decline in marriage in the UK and is also inconsistent with the direction of travel of tax systems across the world which are taking a more neutral approach. A transferable tax allowance has been costed at between £600 million and £3.2 billion depending on the design and would be money poorly spent,’ says Reform.
Reform also comes up with a very sensible suggestion to replace personal allowances with a nil rate tax band at the same level as the current personal allowance £6,475. ‘Personal allowances reduce taxable income and so provide higher benefits to higher rate taxpayers. A zero rate threshold would cap the benefit received to the basic rate for all taxpayers, meaning relief can be provided to basic rate payers in a more efficient and cost effective way. Including compensation for pensioners, this would raise additional revenue of £2.9 billion keeping the current threshold of £6,475,’ says Reform.
Reform is not in favour of an early cut in Corporation Tax on the grounds that the current rates are competitive and that a reduction from 28p to 25p would cost a hefty £1.2 billion.
It is also not in favour of an early rise in the Inheritance Tax threshold. An increase to £1 million, promised by the Conservatives, would cost at least £3.1 billion in lost revenue. Interestingly, the report is in favour of keeping the one-off 50% tax on bankers’ bonuses.