CORRECTION: ADDED EMBARGO
Embargoed: 00:01 Saturday 11 March 2023
- New technology and shifting preferences threaten to disrupt the current tax system in the near future.
- Landmark paper shows that changes in behaviours over time, from shopping habits to electric vehicles, are all affecting a tax system designed for a previous era.
- Policy makers should meet this challenge head on and resist the urge to complicate the tax system even further with new carve-outs and loopholes.
The TaxPayers’ Alliance (TPA) has urged the chancellor Jeremy Hunt to reform the tax system, as changing trends mean the current regime is “holding Britain back”.
Ahead of the budget, pressure is mounting on the chancellor to ditch the plan to raise corporation tax from 19 to 25 per cent. But the TPA argues that the ability of the UK economy to grow and innovate is also being held back by the tax system itself, not just by the current rates of tax.
In the landmark paper ‘Long-term challenges for the tax system’, the TaxPayers’ Alliance considers how ten tax areas are particularly at risk of failing to keep up with a changing world. Changes in behaviours over time, from shopping habits and working practices to lifestyles, are all affecting a tax system designed for a previous era.
The paper comes days after Sir Nigel Wilson, chief executive of Legal and General, said “a combination of regulation and policy” has made it difficult to invest more in the UK, and called on the government to “step up and put rules and policies in place that allow us to invest in the real economy in the UK”.
For many years, people’s shopping habits have been gradually moving away from the high street and towards online shopping. Working practices have also changed, with increased working from home and more people in the gig economy. In entertainment, online streaming services mean people are increasingly less reliant on the BBC. Lifestyles are changing too, with many people swapping the cigarette for the vaping pen, or the internal-combustion engine car for a range of alternatives.
Many of these trends were accelerated during the covid pandemic, as working patterns changed, more people shopped online and demand for housing changed accordingly. Meanwhile, the tax system, already out of date before the pandemic, has remained largely unreformed, struggling to cope with the challenges of the 21st century.
For example, the House of Commons transport committee said last year that failing to radically reform motoring taxation would lead to “an under-resourced and congested future”. They pointed to the drive towards net zero, which would see road users switching to electric cars. That change would cut revenues from motoring taxation to zero by 2040 unless current taxes were replaced. Current motoring taxes would become obsolete, meaning demand for public roads would be unregulated, leading to greater congestion. In response to these emerging problems, the research recommends a shift to a system of road pricing.
The TPA analysed a range of proposals for reform and which reform best resolves the problems, including the simplification of alcohol duty, the abolition of stamp duty and the replacement of corporation tax on profits with a tax on distributions, as well as a rejection of distortionary windfall taxes. The campaign group is calling on the chancellor to resist fiddly carve-outs and loopholes and recalibrate the tax system to make it fit for the modern world.
READ THE FULL RESEARCH PAPER
Given the increasingly diverse tastes of British drinkers, the number of alcohol duty rates should be reduced to three to simplify a complicated, arbitrarily punitive taxation regime.
On driving taxes, rising populations and incomes mean worsening congestion and slower driving. So a road pricing system should replace fuel duty, vehicle excise duty, low emissions zones, congestion charges and workplace parking levies, making driving easier and quicker where there’s congestion and cheaper at other times.
Stamp duty stands in the way of those wanting to move, particularly in a post-pandemic world where working patterns have changed. It also poses barriers to industry growth by preventing workers from moving into geographical clusters. It should be abolished, but a transitional step could be to raise the threshold to £1 million or halve all the rates.
The advent of online streaming services has left the television licence fee unquestionably archaic. Reforming it into a subscription fee would be the simplest answer but a full or partial privatisation could offer greater benefits to taxpayers.
Tobacco taxes are paternalistic and confused, with revenues falling as people switch to less harmful alternatives such as vaping. Either the higher rates of tobacco duty should be lowered to simplify the system or the rates on less harmful heated tobacco products should be reduced to reflect relative harm.
National insurance is a needless duplication of income tax. As technology enables more piecework and self-employment in the gig economy, its pointless distinctions and different rates for the self-employed demonstrate its outdated nature. Aligning its rules and thresholds with income tax could help simplify the system but a full merger should be the final objective.
Advances in e-commerce have disrupted the business model of traditional high streets in areas with higher rents and business rates in favour of online deliveries handled from distribution centres in cheaper locations. Business rates discourage commercial development of land and weigh heaviest on businesses which are more land-intensive, such as traditional retail. The particularly harmful aspects of business rates could be addressed by removing the value of structures and improvements from the ‘rateable value’, leaving a tax on land value.
Potential retail taxes, most notably an online sales tax, largely attempt to solve problems arising from consumer preferences shifting online which ought not to be the role of the tax system. However, business rates do impose genuine distortions against high street retailing and the commercial use of property more broadly. They should be reformed to make them less distortionary and more efficient.
As communication becomes ever easier, and the number of advanced economies grows, it is easier for companies to relocate between tax jurisdictions. Corporation tax discourages investment into the UK economy, which means fewer jobs and lower growth. In the short term, permanently excluding investment from the tax base could soften the edges of the tax but a longer-term, simplified solution requires switching the base from profits to distributions.
- Digital presence taxes attempt to claw revenue from foreign companies but risk leaving the British exchequer worse off, while adding further complexity to an already labyrinthine corporate tax system. Substantial simplification through moving to a single tax on corporate distributions would be more efficient.
READ THE FULL RESEARCH PAPER
John O’Connell, chief executive of the TaxPayers' Alliance, said:
“Taxpayers and businesses are grappling with an increasingly archaic tax regime which is holding Britain back.
“As the way people live, work and shop changes, our tax system has become not just over-complicated, but out of date too. Failing to reform taxes means lost productivity and growth.
“It’s vital that the government begins to recalibrate the tax system to make it fit for the modern world.”
TPA spokespeople are available for live and pre-recorded broadcast interviews via 07795 084 113 (no texts)
Media Campaign Manager, TaxPayers' Alliance
24-hour media hotline: 07795 084 113 (no texts)
Notes to editors:
Founded in 2004 by Matthew Elliott and Andrew Allum, the TaxPayers' Alliance (TPA) campaigns to reform taxes and public services, cut waste and speak up for British taxpayers. Find out more at www.taxpayersalliance.com.
TaxPayers' Alliance's advisory council.
The TPA previously presented a radical but realistic reform of the tax system in The Single Income Tax.
- See here for the House of Commons Transport Committee report - Road Pricing, Fourth Report of Session 2021-22