UK tax system in need of ‘major reform’

The next prime minister must implement “major structural reform” of the UK tax system as it is currently “not up to the job” of meeting public spending, the Institute for Government (IFG) says.

The "Taxing Times: The need to reform the UK tax system" report, released today, reveals decades of “piecemeal changes” to the tax system have left behind a “complicated, inefficient and beset” system, with “perverse incentives that do little to raise revenue”.

And the report said without raising taxes or borrowing more, the scale or scope of public services will need to shrink.

“Governments of all political colours are likely to face more calls over the coming years to increase public spending, as an ageing population puts additional pressure on publicly funded health and adult social care and increases pension costs,” the report said.

“It is going to cost more just to maintain the quality and scope of services that the state currently provides. Yet the UK’s current tax system is not up to the job of meeting these demands.”

The UK’s existing tax bases were being undermined by “technological and behavioural change”, including the rise of electric vehicles and lower smoking rates, which meant the government would receive around £10 billion per year less revenue from fuel and tobacco duties by 2030/31.

Further, the report said growing self-employment and company owner-management, which were currently taxed less than employment, accounted for “nearly one-third of workforce growth in the last decade”.

“Our flawed tax system makes addressing these challenges more difficult,” the report said.

“Sensible, principled reforms to the tax system could allow governments to raise revenues with fewer detrimental side effects, render the system more resilient to economic changes and ensure it is better placed to help meet the fiscal challenges ahead.

“Such reforms could be implemented alongside any government’s distributional or wider economic objectives.”

IFG researcher Joe Marshall, who authored the report, said: “It is not only the amount of tax revenue raised that matters. How it is raised is also important.”

“Politicians of all political stripes must start thinking seriously – and speaking openly – about the need for tax reform and how they can help overcome the barriers that stand in the way of change.”

The report noted the limited power of the Conservatives in UK Parliament, which had “made it difficult to pass any contentious legislation, and it is possible that future governments will find themselves in a similar position”.

“A variety of barriers appear to stand in the way of making reforms. Some of these are political – such as the difficulty of pushing through tax reform that may have long-term benefits but impose short-term costs on some groups – and so particularly difficult for minority governments,” it said.

“Tax is also a complex area, which most members of the public understand little about, meaning it is often easier for opponents to highlight those who lose out than it is for reform advocates to articulate why changes are needed.”

Brexit had also contributed, by casting “a long shadow over Whitehall, depleting the government’s political capital and distracting attention from other long-term policy questions, including tax reform”.

“Developing an effective tax system is an important objective for any modern government, regardless of the Brexit outcome,” the report stated.

“There is scope to start making changes now that will ensure the necessary groundwork has been done when the government comes to focus on these issues. Our objective is to highlight the priorities for action.”

However, governments in the UK and elsewhere have been able to pass tax reforms in the past, and “there is scope to learn from past experience”, the report said.

The IFG said the report was part of its ongoing work on the tax system, which included plans to interview people involved in tax policy in the UK and abroad to understand how tax changes are made.

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