The past three months have seen a deluge of economic, political, and legal moves that would have been unthinkable at the start of the year.
As civil liberties were curtailed on a scale never seen in peacetime and ten million children were turned away from school, new hospitals were built in a matter of weeks, clinical trials were put into turbocharge mode, and the government stepped in to protect the jobs of a third of the working population.
While personal views on these drastic policy changes may differ, no one can deny that Covid-19 has altered the calculation of what is politically possible. The government today is in some ways less constrained than it has ever been.
And with that comes great potential.
This is fortunate, because the UK faces an economic crisis on a scale incomparable to anything in living memory. GDP plummeted by 25 per cent in March and April, government borrowing has risen to the extent that UK national debt is now greater than the economy for the first time since 1963, and the Bank of England has warned of the worst recession for 300 years.
Awakening the economy from months of enforced hibernation and ensuring a rapid recovery is going to be the challenge of our generation. Radical tax policy will be needed, both in the immediate term and looking to the future.
But ministers have a lot on their minds at the moment. So to help give them some inspiration, City A.M. has been asking a range of top tax experts how they would use this newfound scope to be more ambitious than ever before.
From scrapping some taxes altogether to completely re-envisaging others, they’ve come up with some radical changes they would make to the tax system to get Britain’s economy back on track in a post-Covid world.
Abolish corporation tax
Philip Booth, dean of the Faculty of Education, Humanities and Social Sciences at St Mary’s University Twickenham and senior academic fellow at the Institute of Economic Affairs.
Corporation tax worked when companies were listed, filed their accounts, and were owned in the same country. As international capital mobility increased, double taxation agreements attempted to deal with some of the problems arising from companies being domiciled in one jurisdiction while their owners paid tax in various different countries.
But the system is now no longer fit for purpose. It encourages abuse, avoidance and evasion.
Corporation tax should now be abolished. Instead of taxing companies, we should tax their owners, wherever they live, on the dividends they receive and the profits that are retained in their name. This would align the systems for taxing equity and debt finance.
The approach would destroy the tax avoidance industry which is built on the complexity of the current system. It would also encourage investment and remove incentives for companies to gear up their balance sheets while piling up cash in offshore tax havens.
Use the tax system to protect key workers
Justine Delroy, head of tax and structuring at Addleshaw Goddard
Line chef, cleaner, social care worker — 40 hours’ work total in some weeks. Three separate jobs. but thanks to the rise of zero-hours contracts, we know that some people do all of them. Payment is often minimum wage, irregular, and unpredictable.
As the economy is rebuilt, thousands of key workers could have much-needed predictability and stability if companies provided more regular work and working patterns.
But how to incentivise this?
Wages are deductible against profits for corporation tax (CT). One suggestion would be to increase this deduction for every guaranteed day of work per week someone earning under the average wage is contracted to work – a x1.1 CT deduction for guaranteeing one day per week every week, x1.2 for two etc.
This tax change could be targeted at industries where zero-hours contracts are most common, and would start to provide some of the most key workers in society with the predictable income they need.
Scrapping stamp duty is a free lunch
Tom Clougherty, head of tax at the Centre for Policy Studies
Stamp duty land tax is probably the worst tax on the UK statute books.
It combines with our restrictive planning system to gum up the housing market, causing welfare and productivity losses that are completely disproportionate to the revenue raised. It prevents people from moving where the best job opportunities are and keeps families of all shapes and sizes in properties that are ill-suited to their needs.
The economic and societal gains from abolishing stamp duty — especially as it relates to people’s homes, rather than to other properties — would be enormous. The revenue cost, on the other hand, could be quite modest.
Once you factor in the fiscal effects of a more dynamic housing market, abolishing stamp duty on primary residences looks like the nearest thing to a free lunch that any would-be tax reformer is likely to find.
Time to tax wealth better
Robert Palmer, executive director of Tax Justice UK
As we emerge from the corona crisis we need to look at taxing wealth better. Here are two ways the government could do it.
First, look at how we tax income from wealth such as capital gains. Research by academics from LSE and Warwick has found some of the highest earners are benefiting from effective tax rates as low as 11 per cent.
This is because ultra wealthy people can turn income into capital gains and take advantage of lower tax rates.
One idea is to apply an alternative minimum tax, requiring everyone earning more than £100,000 to pay at least a 35 per cent tax rate on their income plus capital gains. It could raise £11bn a year.
The second area is pensions tax relief. The government gives people who invest in a private pension a number of tax breaks to encourage saving. The benefits of these tax breaks overwhelmingly go to the highest earners, with the top 10 pe cent of earners receiving over half of the benefits.
A fairer approach would be to introduce a flat rate of relief for all.
End the factory tax
Matt Kilcoyne, deputy director of the Adam Smith Institute
When your business buys pens or paper or pays someone’s wage, this is written off against revenue. When you buy a big piece of machinery or a building, it isn’t — instead it is written off over time. You don’t account for inflation or the real return on capital.
The UK’s tax treatment of capital investment is in effect a factory tax, and it’s holding Britain back. For every year since 1998, the UK had the lowest level of private investment in fixed capital as a share of GDP in the G7. If we changed tack and treated capital investment the same as running costs, research shows that Britain could increase investment by 8.1 per cent and boost productivity per worker by £2,214.
We should abolish the factory tax by allowing full expensing of capital in the first year. That way, we’d boost investment at the moment we need it most.
Boris Bounce-Back Bonds
Paul Beausang, head of real estate tax, and Bruce Dear, head of London real estate at Eversheds Sutherland
More than almost any other developed economy, Britain is powered by consumer spending. Napoleon called us a nation of shopkeepers. He was wrong — we’re a nation of shoppers. Covid-19 has sapped our confidence to play our real national sport: round the clock retail. Our economy’s shopping addiction is an obvious weakness, but it is also an immediate opportunity.
If we can get the great British consumer spending in big numbers right now, we could avoid the worst of the looming recession. Reducing VAT or income tax won’t be enough. Alistair Darling’s VAT cut during the financial crisis showed that in a time of unemployment and uncertainty, people avoid spending and prioritise saving.
That’s why it’s time for “Boris Bounce-Back Bonds”. Every tax-paying adult should be sent a £300 free-gift income tax rebate locked into a Bounce-Back card. These cards would refresh the consumers that tax cuts cannot reach, because they will be issued on a spend now or regret later basis. Every £300 individual stimulus card would come with the condition that it must be spent (at a safe social distance) in non-essential shops, restaurants, hotels or bars before 1 October 2020. If not, it will be lost — like the bubbles in that beer you didn’t buy.
Bounce-Back Bonds would hit multiple targets simultaneously. They would boost consumer confidence vividly and innovatively, incentivising millions of consumers to get to the shops now. People using them would also spend other money, galvanising widespread economic activity.
Perhaps most importantly, they would lift public morale, and cheer people up, and start positive conversations with the opening: “What did you spend yours on?”
Main image credit: Getty