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Tax system needs radical reform: Mirrlees

10 November 2010
Issue: 4281 / Categories: News , Institute for Fiscal Studies , James Mirrlees , Mirrlees Review , Income Tax , VAT
Review proposes merger of income tax and NI

The UK tax system will require a radical overhaul if it is to be not only more equitable for taxpayers but also make a greater contribution to the public purse, according to a study produced for the Institute for Fiscal Studies.

A document published today by the Mirrlees Review argues that a coherent vision for the tax system is needed. The authors lays out a comprehensive set of proposals for tax reform that could significantly increase people’s welfare and improve the performance of the economy.

They insist that UK taxation should be designed as a whole in conjunction with the benefits system, seek neutrality by not treating similar activities differently without very good reason, and achieve progressivity as efficiently as possible by relying on the rate schedule of personal taxes and benefits.

‘The [country’s] tax system falls short of the ideal in costly and inequitable ways,’ said the review’s chairperson, Nobel laureate Sir James Mirrlees. ‘It discourages savings and investments, and distorts the form they take. It favours corporate debt over equity finance. It fails to deal effectively with either greenhouse gas emissions or road congestion. The revenue it raises and the redistribution it does could be achieved in less costly ways.’

Among the study’s recommendations is a criticism of the ‘bizarre marginal rate structure’ of taxation of earnings. The authors prescribe a simplification of the rate structure of income tax and a merger of the levy with National Insurance contributions.

The Mirrlees Review – an international group of finance experts and researchers commissioned by the Institute for Fiscal Studies – has also renewed its call for an extreme revamp of VAT, which its claims should be extended to nearly all spending.

In July 2008, the review argued for the abolition of VAT’s zero rate and its reduced rates to cut compliance costs for business and government, and trim other taxes by up to £11 billion.

The latest view is almost identical: the authors insist their proposal would ‘reduce complexity and avoid costly distortions to consumption choices. The money raised [could] be spent on cutting income taxes and raising benefits in a way that is broadly distributionally [sic] neutral’.

Sir James remarked, ‘We propose both a long-term vision of a better system, and directions for reform. Some of the recommended reforms involve tweaks to current policy; others involve radical change and are probably for the longer term. It is undeniable that some of the proposed changes would be politically difficult, but failure to reform imposes enduring costs.’

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