George Osborne’s challenge: Will he make his mark as a tax reformer?

Andrew Sentance
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Will Osborne follow in the footsteps of Howe and Lawson (Source: Getty)
Next week’s Budget is a big opportunity for George Osborne – now he’s able to shape public spending and tax policy free of the constraints of coalition politics. One of his Budget themes should be tax reform.

In the 70 years since the end of the Second World War, there have been 22 chancellors of the Exchequer. But there are only two who stand out as serious tax reformers – Geoffrey Howe and Nigel Lawson.

Over the decade when they were in control of the public finances – from 1979 to 1989 – the basic rate of income tax was reduced from 33 per cent to 25 per cent and the top rate of tax from 83 per cent to 40 per cent. The main corporation tax rate on business profits was cut from 52 per cent to 35 per cent and for smaller companies it was reduced from 42 per cent to 25 per cent. Lawson aimed to abolish a tax in every Budget, and was relentless in his drive to streamline and simplify the UK tax system.

In the 26 years since he left office, no chancellor has embraced tax reform in such a wholehearted way. The corporation tax system has been restructured and the rate of tax reduced further. But three other areas of taxation – which make up nearly 80 per cent of government revenues – are in need of serious attention: income tax and national insurance; VAT; and property taxes.

Taxes on income and earnings – income tax and national insurance – make up nearly half of tax revenue. But there are many anomalies and inconsistencies. Low earners and their employers start paying national insurance at just over £8,000 – way below the current income tax threshold of £10,600 and even further below the target of a £12,500 threshold. The burden of national insurance is also much higher than income tax – 13.8 per cent levied on employers and 12 per cent on employees, a combined rate of 25.8 per cent compared with 20 per cent income tax.

The VAT system is riddled with inconsistencies and contradictions. An audio book or e-book carries 20 per cent VAT compared to the zero-rated print edition. Crisps attract 20 per cent VAT but tortilla chips are zero-rated. Caviar is a zero-rated food. None of this bears any relation to current environmental and obesity concerns – a total overhaul of VAT is long overdue.

Council tax, business rates, stamp duty, inheritance tax and capital gains tax are all levied on property values or wealth. These taxes raise over 12 per cent of total revenue, but the rationale behind them is obscure and inconsistent. Council tax valuations have not been uprated for over 20 years and the business rating system is already the subject of a government review. Taxing property transactions through stamp duty hampers the operation of the labour market, by imposing penalties on those who need to move to find a new job. It also discourages downsizing by elderly property owners, which is necessary if we are to cope with an ageing population.

It would be ambitious for Osborne to take on all three of these issues in his Budget next week. But perhaps he can start to address one of them – and make his mark as a tax-reforming chancellor, following in the footsteps of Howe and Lawson.

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