Executive summary
Society and the economy are always changing. Laws and regulations need to evolve, too, to avoid becoming redundant and out of date. That applies to tax just as much as other areas of life. This note considers how ten tax groups are particularly at risk of failing to keep up with a changing world: alcohol duties, driving taxes, stamp duty, the television licence fee, tobacco taxes, national insurance, business rates, high street retail tax, corporation tax and digital presence taxes.
The rapid growth of online shopping, working from home and video conferencing, the decline in smoking and the emergence of heated tobacco products, vaping, online streaming, electric vehicles and the gig economy are all affecting a tax system designed for another era.
For each tax area we consider its long-standing problems, its emerging problems, a range of proposals for reform and which reforms best resolve the problems. Many of the decisions policy makers must make rest in part on what the objective of the tax system ought to be, such as its optimal tax burden and the trade-offs between efficiency, simplicity and various other potential objectives.
We do not address those objectives or levels of government spending but do offer proposals which provide taxpayers as a whole with a lower burden. The literature on optimal tax-to-GDP ratios is extensive and not repeated here.[1]
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Alcohol duty is complicated and arbitrarily punitive towards wines and spirits, especially as consumer tastes diversify beyond traditional patterns. Alcohol harms are mostly borne by individual consumers rather than wider society. The government’s proposed simplification is welcome but it should go further and reduce the number of rates to three instead of six.
Driving taxes very poorly target external costs of driving, which means frequently congested roads, polluted neighbourhoods and – for the most part – over-taxed driving. Rising populations and car ownership levels will continue to exacerbate these problems while growing electric car sales mean government will have to look elsewhere for revenues. Road pricing could replace all five taxes (fuel duty, vehicle excise duty, low emission zones, congestion charges and workplace parking levies), enabling people to access more jobs in places without good public transport options by reducing congestion and speeding up trips.
Stamp duty places a barrier between people who want to make mutually beneficial exchanges of homes, making it harder for home owners to take advantage of new jobs or adjust to new circumstances. The growing role of agglomeration economics and reassessments of working patterns following the pandemic only exacerbate this problem. Full abolition should be the aim but a transitional step could be raising the threshold to £1 million or halving all the rates.
The television licence fee was created to fund the BBC when it was the only television available. It became out of date with the arrival of ITV but the advent of online video and streaming services have left it unquestionably archaic. Reforming it into a BBC 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. They are arbitrarily punitive to smokers and the harms of smoking are mostly borne by individual consumers rather than wider society, especially with the ban on smoking indoors. Either the higher rates of tobacco duty should be lowered to simplify the system or – if the paternalism principle is maintained – the rates on less harmful heated tobacco products should be reduced to reflect relative harm.
National insurance is a needless duplicate of income tax on earned income, with fiddly differences in the rules. 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 ever more starkly. Aligning its rules and thresholds with income tax could help simplify the system but a full merger should be the final objective.
Business rates discourage commercial use and 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 eliminating empty property relief and removing the value of structures and improvements from the ‘rateable value’, leaving a tax on land value.
High street retail tax, most notably an online sales tax, largely attempts 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.
Corporation tax is an inevitably complex tax on income that also taxes corporate investment with inexorable downward pressures on rates as more economies become competitive with the west. In the short term, permanently excluding investment from the tax base could soften the edges of the tax but a longer-term, sustainable solution requires switching the base from profits to distributions.
Digital presence taxes attempt to claw revenue from foreign (predominantly American) 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 provide a more efficient system.
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[1] See Booth, P. et al., Taxation, Government Spending and Economic Growth, Institute of Economic Affairs, 2016, and Heath, A. et al, The Single Income Tax, TaxPayers’ Alliance and Institute of Directors, May 2012.