Allister Heath

In place of tinkering: the 2020 Tax Commission

In place of tinkering: the 2020 Tax Commission
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The report which Fraser mentioned last week, from the 2020 Tax Commission, has just been published - you can download the summary here and full report here. Allister Heath, chairman of the commission and a contributing editor of The Spectator, says more here:-

It is time for Britain to make a vital choice. Our economy is stagnant, crippled by excessively high public spending, high levels of leverage, a mismanaged and inefficient public sector, an extraordinarily complex and punitive tax system and a public mood that has become increasingly anti-capitalist. There are two options. We can either decide to tweak the status quo – try and keep a lid on public spending, reform bits of the public sector and hope for the best. The problem with such a soft option is that it may stave off an immediate budgetary crisis but it will condemn

Britain to permanent relative economic, social and cultural decline.

Or we can drastically change course: reduce public spending much more ignificantly, adopt an entirely new tax system fit for the 21st Century and establish the UK as a global trading hub, generating renewed prosperity for all those who live and work here. We at the 2020 Tax Commission are firmly in this second camp: the old order is broken and needs radical reform. But we are also realists: our proposals, while far-reaching, are practical. They are within the realms of what a competent, ambitious and principled government could deliver over the next decade.

Our starting point is the Chancellor’s long-term forecasts: he hopes to see public spending as a share of GDP fall from 48 per cent last year to 39 per ce in five years' time. Our proposals would take this further, reducing public spending to 33 per cent of GDP by 2020 or thereabouts. That will partly be achieved by economic growth, but will require further cuts in public spending as well. It is impossible to detach levels of public spending from tax reform – one of the early findings of the Commission was that it simply was not possible to move towards a truly rational

tax system while retaining extremely elevated levels of public spending.

Our next step is to map out a dramatically reformed tax system to raise one third of our economic output in tax – we advocate a radical new system that taxes all income from labour and capital only once at a flat rate of 30 per cent, above a generous personal allowance for individuals and with no loopholes. National Insurance and Income Tax are merged into this new system; Corporation Tax, which doesn’t work properly and has led to the legitimacy of the entire tax system being questioned, is repealed and replaced by an unavoidable tax on distributed income from capital, be it equity, debt or property. Several other taxes – including Stamp Duty and Inheritance Tax – are also repealed.

We also advocate substantially increased fiscal autonomy for local government, explain why wealth and financial transaction taxes are damaging and counter-productive and much else besides. The aim is to produce the simplest and fairest, most economically efficient and transparent tax system possible with limited possibilities for avoidance and a dramatic reduction in the double or even

triple- taxation that plagues the current system.

However, our findings remain grounded in realism: we decided to retain VAT exactly as it currently is, despite its administrative costs, to keep a lid on marginal tax rates. Yet our revolutionary reforms to the rest of the system, as we explain drawing on the latest economic theory and evidence, would substantially boost economic growth, productivity, investment, jobs, real wages and political accountability.

The level of economic and policy debate has long been poor in the UK. There is very little awareness of the oodles of academic research on how high marginal tax rates or punitive income or capital taxes reduce growth and jobs. There is even less of a debate on the optimal size of government, or on the moral case for small government and lower taxes.

In the very rare instances when they are mentioned, respectable and important studies are dismissed out of hand or not properly understood; the only “moral” arguments ever referred to are those that advocate the state seizing ever greater proportions of individuals’ incomes. The report’s second big mission is to tackle this poverty of debate head-on. It includes the most comprehensive and thorough review and analysis of the economic, psychological and philosophical literature on the relationship between tax rates, public spending and economic growth and well-being available anywhere.

We cite and refer to many dozens of reputable studies from academics from all over the world and the message is loud and clear: the current levels of spending and tax are dangerously high and need to come down. Many of the taxes currently in place or being proposed have been shown to be bad for the economy and public welfare.

I hope that CoffeeHousers will find the report interesting. It's certainly ambitious, some may say impossibly so. But this country has a proud track record in pulling off the seemingly impossible. Finding a way out of this slump is eminently achievable. All we need is politicians brave enough to make and win the arguments for radical reform.