Successive governments have tinkered with the UK tax system, announcing large numbers of changes which collectively have no clear sense of overall direction. As a result, the tax system is harder to navigate and creates greater economic distortions than it need. Having a clear tax strategy would help governments to judge whether existing policies and new measures under consideration are the most effective and best value for money options – and allow parliament and outsiders to hold the government to account on the choices it makes
It was, therefore, welcome news that Rishi Sunak was to publish a tax strategy alongside his spring statement. But the document ultimately delivered far less than it promised.  More substance is needed quickly if it is to provide an effective guide to policymaking.
Building on the Mais lecture Sunak gave last month, the tax strategy provides some semblance of a strategy on business taxation. He has set out three objectives:
- Capital: “to cut and reform taxes on business investment…find[ing] the most effective way to cut taxes on investment while ensuring value for the taxpayer”
- People: “encourage businesses to offer more high-quality employee training and explore whether the current tax system…is doing enough to incentivise businesses to invest in the right kinds of training”
- Ideas: “We want businesses to…[invest] more in their own transformative R&D…The Spring Statement announces improvements to the R&D tax reliefs, setting out support for data and cloud computing costs, refocusing relief on R&D undertaken in the UK, and allowing businesses to claim relief on R&D supported by pure maths…We will continue to reform and improve the R&D tax reliefs at the next Budget”
The real test of this will be in the autumn budget when Sunak has said he will announce further tax changes to deliver on these objectives. Do those end up being the most effective policies? Do they offer best value for money for the tax payer to achieve the desired outcomes? Is it clear why those policies have been chosen in preference to others and does it provide the private sector with a clear sense of the future direction of travel?
But on personal tax there was no hint of a strategy in the document and the set of policies Sunak has announced so far provide no clear sense of direction.
There is a clear economic story to tell on his reforms to income tax. By freezing the personal allowance and cutting the basic rate of income tax, he is cutting the headline rate and broadening the base of tax. This type of approach will typically reduce distortions and so help raise as much money as possible while doing less to discourage economic activity.
But his choices on National Insurance contributions (NICs) pull in exactly the opposite direction. Sunak has chosen to stick with his planned 1.25 percentage point rise in NICs while pre-announcing a cut to income tax. But NICs operates much like income tax – just with a narrower tax base, which covers earnings and self-employment income but not income from pensions, investments or property. This shift in the tax burden from income tax to NICs means the tax system is more distortionary than it could be, creating greater incentives for people to spend time and effort rearranging their affairs to minimise their tax liability – for example, be rebadging income as dividends rather than earnings.
Overall, Sunak’s announcements on personal tax show no coherent vision economically. We should not allow politicians to keep up the pretence that NICs is anything other than a tax on income, much like income tax – the main difference between the two is that the former is less progressive and imposes more of the burden on workers and less on those receiving income from investments and pensions.
Sunak’s tax plan promises to review existing tax reliefs and allowances and reform them “to make the tax system simpler, fairer and more efficient”. This is welcome but, if this review is to bear fruit, he will need to have a clearer framework for judging them. There are many different ways one could define ‘fair’. And while it is good to aim for an efficient tax system, that needs to be judged in the context of what other objectives the tax system is aiming to achieve – not least how much money the government wants to raise and how the government wants to redistribute resources across the population.
A well-designed strategy could help the chancellor to redesign the tax system to be less distortionary and help the public to hold the government to account for achieving their stated objectives on tax. But while itis welcome that Rishi Sunak has started to lay out a tax strategy, his ‘tax plan’ is not sufficient in itself to provide a meaningful guide to policy decisions. A stronger framework will be needed if the promised review of reliefs and allowances is to deliver substantive change.