Is there ever a popular way to raise taxes?

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There is an inverse link between tax complexity and economic growth (Source: Getty)

Caught between a rock and a hard place.

This is where the chancellor has been described as finding himself as he approaches the Autumn Budget.

There has been speculation aplenty in recent weeks. Will Philip Hammond cut pension reliefs to fund tax breaks for the young? Could the self-employed working in the private sector soon find themselves facing the same rules as those in the public sector?

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Or might the chancellor freeze the continued rise in income tax thresholds – a move that Ryan Bourne suggested in this newspaper would amount to taxation by stealth?

We know that the dip in productivity has left Hammond with little room for giveaways if he wants to achieve his aim of reducing borrowing to two per cent of GDP by 2020/21.

Increased taxation is therefore the only realistic means of funding boosts for public services. Traditionally, the first Budget after a General Election is seen as a good time to raise taxes – getting the bad news out of the way and largely forgotten before the next one.

But we are in unique times, and given the instability we have seen in recent weeks, Hammond will likely be wary of doing anything that rocks the boat.

While a number of recent polls have indicated that people are not completely against paying a bit more for improved public services, they are unlikely to jump for joy when it hits their pay packet.

But if the chancellor feels he has no choice but to raise tax, there might be ways to make such a move more palatable.

One of the reasons the tax rises for the self-employed announced in the March Budget landed like a lead balloon was because they came somewhat by surprise.

There had not been much discussion of the impact of the growing trend towards flexible and gig work on tax revenues.

If the government had waited until after publication of Matthew Taylor’s review of modern employment practices, and had begun sowing the seeds for change, at least this debate could have been had.

We have long called for roadmaps setting out the direction of tax policy and the end goal – this is a consistent message from the people and businesses we speak to. This way they can get used to changes and plan ahead. It’s not unfeasible for roadmaps to get cross-party support – as was the case with the package of corporate tax reforms originally initiated by the then Labour government.

Roadmaps would also help engender greater dialogue with the public on tax, which could help smooth the way for difficult tax changes. Our Citizens’ Juries have indicated an overwhelming appetite from the public for more information and understanding of fiscal policy.

Moreover, when people understand the trade-offs, they are more accepting of tax changes.

But what sort of tax increases would be the least unpopular, if the chancellor decides he must go down that route?

New PwC research has found that people would prefer to see a cold, hard look at reducing tax reliefs and incentives, rather than an increase in tax rates or the introduction of new taxes.

This could be because they feel they don’t directly benefit from reliefs and incentives. When you consider that there are more than a thousand tax reliefs in the system, it’s easy to see why they might be hard for people to understand.

Businesses can be equally perplexed, particularly SMEs, which are often unaware of the incentives available to them, or have to spend considerable amounts of time understanding and accessing them.

Cutting the volume of reliefs would also bring fiscal benefits beyond the tax saving. PwC analysis of more than 160 economies worldwide shows an inverse link between tax complexity and GDP growth.

Decluttering the unwieldy system by removing some of the reliefs could help reduce complexity, helping to provide clarity for businesses and the public, while also providing a knock-on benefit for economic growth.

Of course choosing which reliefs to chop is easier said than done. Those adversely affected by such a change will shout the loudest. But that re-emphasises the need for engagement with all sorts of taxpayers.

The lack of room for manoeuvre comes at a critical time for the chancellor. If he sticks to his policy of just one major fiscal event a year, then he has only two Budgets before Brexit.

Now is the time for a vision for tax policy over the longer term to kickstart debate on future changes. Legislative tax changes will be hard, but mapping a future direction should be eminently possible.

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