The UK’s tax system is riddled with inefficiencies and unfairness, according to a new report by the Institute for Fiscal Studies (IFS), but tight public finances are making much-needed reforms difficult to implement. No political party wants to address it
The IFS report argues that while tax revenues are currently at record highs, the way they are collected is causing unnecessary economic distortions and unequal burdens on different groups.
Almost all our taxes could be substantially improved in their design, often with benefits for economic growth and efficiency. Tax reform, however, is much easier when the government has room for manoeuvre in the public finances.
Stamp duty land tax, one of the most damaging taxes we have, is a good example. There is no economic rationale for imposing a heavier tax charge on properties that change hands more frequently: it gums up the housing market, discourages older families from downsizing (Johnson, 2023) and inhibits economic mobility. Stamp duty should not be reformed – it should be scrapped.
The report highlights several areas requiring urgent reform, including:
- Stamp Duty Land Tax: The IFS calls for scrapping this levy on property purchases entirely, arguing it discourages mobility and harms the housing market.
- Council Tax: The report identifies the tax as both regressive (hitting lower earners harder) and outdated, calling for regular property revaluations to ensure fairness.
- Environmental Taxation: The IFS advocates for more efficient and impactful measures to address climate change, such as carbon pricing.
- VAT: The report suggests streamlining the complex VAT system, potentially by reducing or eliminating the current multiple rates.
- Taxation of Savings and Employment Income: The IFS proposes reviewing these systems to ensure fairness and encourage economic activity.
While acknowledging the difficulty of enacting reforms without increasing the tax burden, the report stresses their importance: The common theme is that even with tight finances, reforms remain necessary. We cannot afford to simply accept a poorly designed tax system.
The report’s findings are likely to fuel the ongoing debate about tax policy in the UK, with policymakers facing the pressure to balance the need for reform with the constraints of public finances.
Here are just a few reasons why the UK tax system is not only confusing but growth inhibitive.
- Loss of Personal Allowance: Everyone in the UK gets a tax-free allowance called the Personal Allowance. In the 2023/24 tax year, it’s £12,570. However, individuals earning over £100,000 start losing this allowance gradually, at a rate of £1 for every £2 earned above £100,000. This means their taxable income increases faster than their gross income, leading to a higher effective tax rate.
- Effective Tax Rate: The combined impact of losing the Personal Allowance and paying higher income tax rates (40% in this bracket) can create an effective tax rate of up to 60% on income between £100,000 and £125,140. This can feel like taking a bigger chunk out of their paycheck compared to someone earning just below £100,000.
- Comparison Trap: It’s important to remember that even with this higher effective tax rate, they’re still earning significantly more than the national average and have a higher disposable income than most people. However, comparing their situation to someone earning slightly less who still has the full Personal Allowance can create a sense of being “worse off.”
Time for another song about the taxman?
In 1966, the mega band Beatles penned and recorded a song called Taxman. This was in response to the band members being liable for a super tax that grabbed up to 90% of their income. Here’s a snippet:
“There’s one for you, nineteen for me
‘Cause I’m the taxman
Yeah, I’m the taxman
Should five percent appear too smallThe Beatles, The Taxman
Be thankful I don’t take it all
‘Cause I’m the taxman
Yeah, I’m the taxman”
Songs about the taxman have peppered the airwaves over the years, including songs by The Kinks, Rolling Stones, Wille Nelson and Ralph Willis. Given the cost of living crisis and inflation, are we overdue another song about the taxman?
The commentators in this IFS podcast, who share their arguments for a more transparent and fairer tax system, seem up for a new song for the times aimed at unfair tax grabs. While you may agree with that, you may not agree with everything they have to say.
One of the speakers says the UK government favours the self-employed, which may not sit well with all Freelance Informer readers, but the podcast is worth a listen. There are some very interesting points made especially around VAT, Personal Allowance and tax-related help with childcare where the commentators feel the tax system penalises taxpayers unjustly and disincentivises people from taking promotions, taking a higher paying job or in the case of the self-employed taking on more clients or work. In the end, no one is “better off” not even the tax man.