Taxation logo taxation mission text

Since 1927 the leading authority on tax law, practice and administration

VAT overhaul 'will aid squeezed middle'

01 August 2012
Categories: News , Admin , Capital Gains , Income Tax , Inheritance Tax , VAT
IFS director calls for 'politically difficult' tax reform

The UK’s tax system could be drastically shaken up to improve the living standards of people in the ‘squeezed middle’, according to the director of the Institute for Fiscal Studies (IFS), Paul Johnson.

In Fairer by Design, a report written for the Resolution Foundation, Mr Johnson calls on the government to make a number of radical changes to aid those on low and middle incomes, including a reduction in National Insurance contributions for older workers by bringing forward the age at which people stop paying to 55, or by increasing the contributions threshold past the same age

Most significantly, the IFS boss moots an overhaul of the ‘complex, inefficient’ VAT system that would see the sales tax being levied on all goods.

‘Extensive zero and reduced rating is an expensive and extremely inefficient way of effecting redistribution [for taxation],’ he says.

‘It would be possible to make the overall system as redistributive, or more redistributive, on average by ending this zero and reduced rating.’

The move would allow for an increase in welfare benefits and the reduction of other taxes, Mr Johnson adds, acknowledging that such a reform would be ‘politically difficult, to say the least – but dispassionate analysis shows clearly that if we do want a tax system which is more efficient and at least as redistributive, we will need to grasp certain nettles’.

As well as an extreme revamp of VAT, the document for the Resolution Foundation, an independent research organisation focused on improving the economic situation of earners of low and modest incomes, posits changes to inheritance tax (IHT) that would make it more efficient, coherent and more acceptable to taxpayers.

In its current state, IHT’s main problem is that it easiest to avoid by those of very substantial means, says Mr Johnson.

‘The most radical reform would be to transform IHT into a tax on lifetime receipts of gifts and inheritances. More minimal and incremental changes would at least reduce the scope of reliefs, which allow agricultural land, many businesses and some share holdings to be passed on free of tax.’

The IFS director is also critical of capital gains tax (CGT), particularly the ‘numerous reliefs and exemptions [that] have the potential to create inefficiencies while generally advantaging the well-off, relative to those of modest means.

‘Examples include entrepreneurs’ relief and… the exemption from CGT of gains realised at death. This creates a serious “lock in” effect while depriving the Exchequer of revenues,’ says Mr Johnson, who drew on the Mirrlees Review of efficient taxation for his report.

‘Reforms look politically difficult,' he notes, ‘but if we are serious about finding ways to redistribute [taxation] more efficiently then some sacred cows will need to be gradually put to sleep, if not immediately slaughtered – rather as... the married couple’s allowance were gradually allowed to die.’


back to top icon