George Osborne’s tinkering has made the UK tax system more complicated than ever

 
Alex Wild
The Chancellor George Osborne Prepares To Give His Budget To Parliament
The problem is that the tax system is struggling under the weight of the huge expenditures it finances (Source: Getty)

After eight Budgets and six Autumn Statements, we have a pretty good idea of what kind of chancellor George Osborne is.

According to the Office for Budget Responsibility’s policy measures database, before Wednesday he had made 585 separate tax policy changes at these so-called “fiscal events”. There had been 165 income tax changes, 107 corporation tax changes, 71 national insurance changes, 45 capital gains tax changes, and 22 stamp duty changes. On Wednesday he announced another 50 tax measures.

Tolley’s yellow and orange handbooks, the tax professional’s bible, have grown from 17,795 pages to an absurd 21,602 pages since Osborne became chancellor. The sheer volume of fiddling shows that there has been too much tinkering, in contrast to the exciting calls for real tax reform made in Opposition. Simplification, it seems, will have to wait.

Of course, not all of these have been bad decisions or tax hikes. Since 2010, the income tax personal allowance has increased substantially from £6,475 to £10,600, with a further increase to £12,500 to come. The headline rate of corporation tax has already been cut from 28 to 20 per cent, and will continue to fall to 17 per cent by 2020. Fuel duty, still one of the highest in the world, has been frozen since 2011 and the alcohol duty escalator has been abolished.

Stamp duty, which remains a truly dreadful tax, has been improved by ending the stupid “slab” structure for both residential and commercial properties. But on Wednesday, the chancellor repeated the error he made with residential property in 2014 by hammering more valuable properties with much higher rates. The changes for residential have killed the top end of the London property market, decreasing transactions and revenues. Along with all the arbitrary restrictions to tax deductibility of interest, the property sector, which typically has a lot of debt, was a big loser.

The problem with Osborne is that good ideas too often turn into bad ones. An overdue increase in the inheritance tax threshold has been made farcically complicated, for instance. Instead of simply increasing the nil rate band, an additional £175,000 transferable tax-free allowance that only applies to main residences is being phased in. This has necessitated a series of rules to allow people to downsize and not lose part or all of the new “residential nil rate band.” Remarkably, it’s far more complicated than it sounds.

Perhaps the worst part of yesterday’s Budget was the chancellor’s complaint that our capital gains tax rates are among the highest in the developed world. This is true, but only because he significantly hiked them at his first Budget. Now the rates are to be cut to 10 per cent and 20 per cent, but not for property or carried interest, seemingly to avoid negative headlines about tax cuts for landlords and private equity executives – two groups of people it’s fashionable to dislike.

True to form, there were some good policies among the bad and the absurd in the Budget. Increases to the 40p income tax threshold, set to rise to £50,000 by the end of the Parliament, will come faster than expected, starting a reversal of years of fiscal drag and outright cuts to the threshold. But the number of people paying the higher rate has increased dramatically in the 25 years since it was introduced – from one in 15 income taxpayers in 1990 to one in six income taxpayers by 2014. Even with the threshold increases pencilled in, HMRC still expects 1m more people to be paying the higher rate in 2020 than today.

The problem is that the tax system is struggling under the weight of the huge expenditures it finances – 83 per cent of them at least. The sum total of all the tinkering so far is that the tax take will be equal to 34.6 per cent of GDP in 2020-21 compared to 34 per cent of GDP in 2010-11. The amount of tax collected as a percentage of GDP has been remarkably flat since the early 1980s – this seems to be all that is economically sustainable or politically acceptable, so there is no option but to reduce spending if borrowing is to fall.

And on this front progress has been painfully slow – spending as a percentage of GDP fell by 5.3 percentage points in the five years under the coalition. By comparison, between 1983-84 and 1988-89, the Thatcher government reduced spending by 9.4 percentage points. Roughly speaking, Osborne is moving half as quickly.

Until spending is brought under control, therefore, fiddly gimmicks and sneaky increases to things like Insurance Premium Tax will sadly continue to be a feature of the tax system.

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