The framing of the budget due on the 26th of November has largely focused on two aspects. First, the government's fiscal "black hole", i.e. the assumption that taxes must rise and/or public spending must be cut to minimise borrowing and thus satisfy the bond market; and second, the need to stimulate growth so that future revenues may provide the means to reverse those tax rises and/or spending cuts. The metaphor is meant to be terrifying, a forbidding gravity well that will drag us to our doom, but it actually works best in the sense that no information can escape from this conceptual void, most notably the actual size of the hole itself. This currently lies, depending on who you believe, somewhere between £20 and £50 billion.There has also been a change in the term used to describe the government's operating contingency, from "fiscal space" to "headroom". What the language indicates is that the technical analysis of the state's finances has adopted a more emotional register, even if planetary extinction and bumping your head are not on the same level. The consensus is that as the public's tolerance for spending cuts has reached its limit, tax rises are now inevitable.
While there may be profit to be made speculating on the Chancellor of the Exchequer's plans in the financial markets, there is little point wondering about the budget's political economy. Rachel Reeves' speech will, I confidently predict, not mark a radical departure from the neoliberal consensus of the last 50 years. Both tax and welfare will be presented as necessary evils. There will be more parsimonious benefits and tighter sanctions. More funding will be announced for the NHS, with the quid pro quo of more "reform". Growth will be invoked in the abstract, but the concrete measures will be pitiful when not delusional. No doubt there will be more funding to make the UK a "leader in AI". If the rumours are to be believed, there may be a penny on income tax and the same off NICs, green levies cut to lower energy bills, and the abolition of stamp duty. Or maybe these are all distractions intended to leave us relieved that she hasn't changed much at all.
It is in this context that a number of UK think-tanks have come together to present a series of proposals to reform the tax system. These reforms can, they say, be revenue-neutral. Rather than increasing receipts, the idea is to make the tax system more efficient and remove anomalies and disincentives, which should encourage growth. You don't have to go to the extremes of a flat tax or the Laffer Curve to understand the ideological link between tax "simplicity" and rightwing economics, but that is not to say that complexity is necessarily good. The question as ever is cui bono?, and you can get a pretty good sense of that by considering the think-tanks involved. The group is presented as spanning the "political spectrum", from the Adam Smith Institute to the New Economics Foundation, but the centre-right bias is pretty obvious, down to including Labour Together, which is more known for factional plotting in its namesake party than developing economic policy.
The proposals are none-the-less interesting because of what they tell us about the presumed limits of the possible. Some will have been watered down for palatability, and to avoid any one proposal crowding out the rest. For example, a land-value tax (LVT) would be supported by a genuinely wide spectrum of economists (as would a UBI), but that is replaced here by the abolition of stamp duty (SDLT) and a revaluation of Council Tax bands. That the reform of property taxes is the first item on the agenda is indicative both of the dysfunction of this area but also of the propertarian assumptions of the think-tanks. There is no suggestion here that the amount of capital wrapped up in domestic property is a problem for the economy and a reason why domestic investment in production is low. The second proposal is to extend VAT to more goods and services but lower the headline rate. It's typical of the report, which is only 8 pages long and has little in the way of evidence or justification, that it doesn't explain why VAT only applying to half of all spending is a problem. There's also a whiff of naivety in suggesting that we add VAT to food and kids clothes in the midst of a cost-of-living crisis.
The proposal on income tax is about smoothing the cliff-edges that occur with marginal rates and the withdrawal of subsidies, such as for childcare. This is certainly a real problem, though the idea that it disincentivises people from taking pay rises or coming off benefits is questionable. There's certainly evidence for the latter, but that simply highlights the poor design of the benefits and the reliance on means-testing. At no point do the report's authors suggest that benefits could be made universal in a revenue (and expenditure) neutral way, which would certainly simplify the system and do away with most of the sanctions regime. The fourth proposal is to "Tax all income from work equally", which translates into merging NICs with income tax. Few would object to this, but the report's shallowness (apart from a reference to the 2010 Mirrlees Review) obscures the significance of that "from work" qualifier. The major issue in not that NICs become regressive for salaries over £50k but that there is a lower tax rate on dividends and capital gains, which leads to disguised employment.
The fifth proposal returns to property with the suggestion that landlords should be able to fully expense mortgage costs, which they can only do today by setting up a company, and to levy NICs on rental income. In other words, this is directed at petty landlords, in particular the buy-to-let variety who are mortgaged to the hilt. The separate packages are meant to be standalone, but clearly if both #4 and #5 were implemented, the net result would be a tax cut (through 100% mortgage relief) for petty landlords. How that is meant to help GDP growth is not at all clear. Perhaps the most amusing part of this is the revenue neutrality rider: "This would be through adjusting headline Income Tax rates in whichever direction is appropriate." There's an obvious conflict here with package 4 ("Adjust Income Tax rates to achieve revenue neutrality"), inasmuch as the same adjustment is unlikely to to achieve neutrality for both income from work and income from rent. A choice would have to be made between the interests of landlords and those of the working population. Less than 5% of the population are landlords, while 13% of MPs are.
The sixth proposal continues the property theme, but here in the form of equities and other financial assets. The package includes a capital gains allowance to offset fluctuations in interest when borrowing to invest; an end of "rebasing" on death for CGT calculations to disincentivise people holding onto assets rather than passing them to others who may make better use of them; and (the highlight in the press) the application of an exit tax (aka "settling-up") that would require CGT to be paid on domestic assets when leaving the country for good. The revenue neutrality rider for this package is: "Headline CGT rates should be adjusted in whichever direction is appropriate for revenue neutrality", which is worth noting because it emphasises that this group of think-tanks presumably do not agree that capital gains (along with inheritances) should be treated as income and taxed as such. The differential between income tax and CGT rates (and Dividend Tax rates too) will remain.
The final package concerns Corporation Tax. The proposals are to allow full expensing of all up-front business spending (not just capital expenditure on fixed assets) and to remove the limits on loss deductions, "with appropriate safeguards against abuse". This would certainly simplify matters, but as that last clause hints, it would require a new raft of regulations and checks to ensure that businesses won't simply defraud the Exchequer, or criminals pose as business owners. The experience of the Covid-19 pandemic does not inspire confidence. There are good arguments that capital expenditure should get tax relief to encourage investment in productive capacity, but the idea that we should have no qualification rules for the sake of simplicity seems naive. Offsetting the cost of new technology on the shopfloor may help improve productivity, but it's less obvious that fully-expensing company cars will do so given that their usage won't change.
What this report suggests is that the think-tankers who routinely applaud themselves for thinking radical thoughts aren't expecting much in 3 weeks time, but they will be ready to go on TV and explain why if only the Chancellor had been brave enough to adopt their suggestions long-term growth would be assured. The subtext is that Reeves needs to be more generous to business and to investors, for they alone are the wealth-creators. For all the emphasis on revenue-neutrality, the packages taken together would probably be implemented in a way that shifted more of the tax burden onto consumers and less on savers and (domestic) investors, despite demographic trends requiring the opposite (fewer working-age adults, more well-off pensioners). And they are probably justified in thinking that both Reeves and Starmer will be sympathetic to that tilt, just as they have shown themselves to be sympathetic to watering down employment rights and green levies under similar pressure from business.
