Annabel Denham

20 taxes Rishi should bin

20 taxes Rishi should bin
(Getty images)
Text settings
Comments

When Rishi Sunak takes to the Despatch Box on Wednesday it will be against a backdrop of colossal national debt, the recent rise in government bond yields and the ongoing Coronavirus crisis. The British state owes £2.1 trillion, ten times the size of the entire economy of an independent Scotland.

Yet some concerns over the health of the public finances are misguided – or at least exaggerated. The increase in borrowing to pay for Covid does not itself have to be repaid (at least in the short term). Why? Because provided the government can continue to make the interest payments, debt can simply be rolled over. What's more, the UK economy is already at – or close to – its maximum taxable capacity. If we hike taxes, we risk slowing growth and possibly even reducing revenue for the Treasury.

Instead of hiking taxes, Sunak should do something bolder, and scrap – or radically overhaul – taxes. This would simplify the tax system, reduce the overall burden of taxation, and eliminate many harmful distortions that stifle the UK’s productivity and prosperity. Here are twenty taxes to place on death row:

Corporation Tax:

Described by the OECD as the 'most harmful for growth', Corporation Tax is one of the most inefficient ways of raising government revenues. It amounts to a tax on wages, consumers and investment – or a combination of all three. It could be replaced with a single income tax on capital income administered at the corporate level, similar to how PAYE works on wages.

Diverted Profits Tax:

The Diverted Profits Tax is an element of the post-Financial Crisis legislation that aimed to rein in Big Tech and finance companies which, the government felt, did not pay their 'fair share' to the Treasury. Were the Chancellor to reform Corporation Tax, this tax, reliant on the general taxation of profits, would cease to be relevant.

Capital Gains Tax:

Revenues from CGT account for just 1.56 per cent of Treasury revenues (in 2019/20) yet the tax has huge adverse impact. It’s a double tax that discourages entrepreneurship, punishes those who choose to invest their money, and encourages avoidance. Any attempt to raise it will hinder our recovery.

Bank surcharge:

A tax on the profits of financial institutions introduced under the Coalition government to, in essence, punish for perceived moral failings. It's hard to think of any principled reason for the bank surcharge to exist.

Inheritance tax:

Britain’s 'most hated tax'. It is an inconvenient, economically distorting and arguably immoral duty, is often a form of double taxation, and forces bureaucracy onto families of the recently deceased. It should be scrapped.

Stamp Duty Land Tax:

From 'most hated' to 'worst': SDLT distorts the allocation of assets, discourages investment, and tends to make housing (even) more expensive. Extending the Stamp Duty holiday that was announced last July would be a step in the right direction; abolishing it entirely would be a leap towards lower costs, increased labour mobility and greater productivity.

Other property taxes:

Council Tax, the Community Infrastructure Levy, business rates and affordable housing and other s106 obligations could all be replaced with a single land value tax. Under this proposed system, disincentives for property improvements and housebuilding would be removed.

Licence Fee:

There is no moral case for requiring people to fund the BBC if they have no interest in its services. The licence fee is anachronistic, fails to reflect viewing habits, and ought to be binned.

Alcohol and tobacco duties:

These levies are justified on the basis that alcohol and tobacco consumption imposes costs on others. But there is some evidence that the duties far exceed the external costs. They could be better described as regressive sin taxes which, like the Licence Fee, hit the poor hardest.

Gambling duties:

Supporters of a tax on gambling sometimes make the argument that it helps tackle issues it can lead to, such as addiction. But this fails to account for the fact that, while the tax appears to do little to help those addicted to gambling, it also penalises other more moderate gamblers.

Stamp Duty on shares:

There is no good reason to tax the transactions of shares. Both the Stamp Duty Reserve Tax and Stamp Duty (not to be confused with SDLT) artificially depress equity values and discourage investment. Like many other taxes on this list, Stamp Duty is often an unnecessary double tax that further distorts the allocation of capital assets in the UK economy.

Apprenticeship Levy:

This is a crude payroll tax that ought to be axed. The new set of rules has been grafted onto the existing National Insurance system, introducing new distortions, further opacity and additional complexity. Businesses – which have no obvious need for, or means of generating, apprenticeships – are simply subsidising others. Even those who want to develop apprenticeships have found the inevitable bureaucracy debilitating and disincentivising.

Vehicle Excise Duty:

Given the impact of climate change, congestion, road construction, there is a case for continuing to impose a levy on fuel. But the vehicle excise duty fails because it does not account for how often different motorists actually drive. To give an example, a vehicle owner who predominately drives on an infrequently maintained old country road will still have to pay the same tax (providing both parties have identical vehicles) as a motorist who predominantly uses brand new 11 expensive motorways. Is this fair?

Air Passenger Duty:

Air Passenger Duty was originally introduced in 1994 as a proxy for value added tax, as there is no VAT on air tickets. But it has been ratcheted up way beyond what a reasonable rate of VAT might be. Later justifications were linked to climate change policy, but APD's discriminatory and incoherent application means there is a strong case for its abolition. Were it to exist at all, it should be a tax on carbon emissions, or airlines should be part of the appropriate Emissions Trading Scheme.

The Climate Change Levy and renewables obligations:

These add economic distortion and complexity to the tax system. They could be brought into a single, less distortionary, environmental taxation system – either through the Emissions Trading Scheme or a comprehensive carbon tax.

Aggregates Levy:

This is another intended environmental charge that has been interpreted broadly by HMRC and become a much wider tax on the economy. It should be removed and replaced with either regulations or a targeted tax to encourage quarry owners and others to restore sites following aggregate removal.

Whatever Sunak does choose to announce, one thing is clear: raising taxes now would dampen our economic recovery. Tinkering won’t help investor confidence or provide clarity to beleaguered businesses – our tax code is already 12 times the length of the King James Bible. This Budget could be the most consequential in decades: when Rishi emerges from Number 11 it should be with red box in one hand and metaphorical axe in the other.