Rachel Reeves urged to levy one-off wealth tax
Researchers say Rachel Reeves should introduce a one-off wealth tax to avoid the “direct disincentive” of an annual levy.
But the Chancellor risks wreaking havoc on the UK economy unless she breaks Labour manifesto commitments and introduces vast reforms to the wider tax system, according to a report by the Institute for Fiscal Studies (IFS).
Top economists are weighing in on the pre-Budget tax debate as mandarins from the Office for Budget Responsibility (OBR) and the Treasury is holding regular negotiations on forecasts and the effects of taxes on growth.
The non-partisan think tank, favoured by Westminster officials, has warned Reeves that “directionless tinkering and half-baked fixes” could put the UK economy under threat.
Researchers urged Reeves and the Treasury to ensure tax hikes are complemented by smart reforms that protect investment and spending levels in the UK economy.
The IFS is the latest organisation to urge Reeves to avoid making small tax hikes, with Oxford Economics claiming a fiscal crisis could erupt if the Chancellor makes several small changes to smaller taxes.
With Reeves set to raise taxes by around £30bn, economists at the think tank have said Reeves should simplify the tax system, consider reforming property and council taxes, and take care with any mooted changes to capital gain taxes.
Stronger tax compliance targets and policy design could also yield greater levels of revenue, according to researchers.
Isaac Delestre, a senior research economist at the IFS, said the government should aim to risk political support in order for hopes of a revival in growth to be maintained.
“Almost any package of tax rises is likely to weigh on growth, but by tackling some of the inefficiency and unfairness in our existing tax system, the Chancellor could limit the economic damage.
“The last thing we need in November is directionless tinkering and half-baked fixes.”
IFS director Helen Miller said: “Muddling through by simply raising rates of current taxes might appear the easier option – Rachel Reeves’s predecessors in the Treasury have all too often shied away from taking bold steps to improve the tax system.
“Relying on badly designed taxes to bring in additional revenue will bring unnecessary economic damage.”
Rachel Reeves warned on tax reform urgency
The report said raising National Insurance, VAT or income tax would “straightforwardly raise large sums” yet break manifesto commitments, though authors said raising large sums in other ways may not be “sensible”.
Extending a freeze on income tax and national insurance thresholds until 2030 could raise £10.4bn as Brits would pay more where higher wage growth is not matched by adjustments in inflation.
The IFS warned that Labour manifesto pledges on national insurance would be broken as a result of such a decision given it says national insurance for workers would not be changed, while it said the rates for income taxes would not be changed by comparison.
Researchers also said higher stamp duty charges should be avoided while taxes on pension contributions, such as through restricting the pension tax relief or attributing employer contributions to defined benefit arrangements, would be “unfair and distortionary”.
The government was also warned to avoid introducing a new annual wealth tax while a new tax on income for a particular spending stream would add “unnecessary complexity”.
The calls for vast tax reforms are set to grow in the coming weeks.
The National Institute of Economic and Social Research (NIESR), which estimated the fiscal hole to be closer to £50bn, said on Friday the government should prioritise raising income tax over VAT to put the UK economy on a more stable footing.
On Tuesday, Treasury Select Committee MPs are set to hear from top economists on the best possible tax hikes that could be made at the Budget.