Tax without design
Paul Johnson
15th CTA address
May 13 2014
© Institute for Fiscal Studies
Tax without design?
• We entitled the Mirrlees Review “Tax by design”
– But does the current system look “like someone designed it on
purpose”?
• In particular have recent changes been:
– Consistent?
– Coherent?
• But first, where do revenues come from?
© Institute for Fiscal Studies
Composition of tax revenues
Share of total net taxes and NICs
100%
16.7
12.3
4.5
7.9
9.4
5.0
5.9
8.5
15.6
16.8
15.6
17.6
17.3
16.8
19.5
19.1
25.7
28.0
28.6
29.4
16.0
80%
2.7
11.0
70%
60%
50%
11.6
40%
30%
13.0
3.3
9.8
14.5
90%
20%
10%
0%
Other
Fall in revenues from
“sin taxes” and petrol
Capital
duties taxes
more than
offsets rise in VAT
Onshore corporation
tax
Increasingly
coming
Other indirect
taxesfrom a
relatively small number of
high
VAT income people
Top 1% contributed:
11% in 1979
NICs
21.3% in 1999-2000
27.5% in 2011-12
Income tax
1989–90 1999–00 2007–08 2018–19
© Institute for Fiscal Studies
Notes and sources: see Table 2.5 of The IFS Green Budget: February 2014.
Direct taxes
• The basic structure looked fairly straightforward in 2009.
© Institute for Fiscal Studies
Income tax and employee NICS marginal rates
2009-10
70%
Higher rate threshold
60%
Personal allowance
Marginal rate
50%
40%
30%
20%
10%
0%
0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 160
Gross annual income (£1000s)
© Institute for Fiscal Studies
Notes: Marginal rate of income tax and employee’s National Insurance Contributions.
Previous years’ thresholds have been uprated to 2014-15 prices using the CPI.
Assumes employee contracted into State Second Pension.
Direct taxes
• The basic structure looked fairly straightforward in 2009
– Gone a bit downhill since then
© Institute for Fiscal Studies
Income tax and employee NICS marginal rates
2015-16 (married, non-working spouse)
70%
60%
Marginal rate
50%
40%
30%
20%
Income tax allowance and
NI threshold delinked
10%
0%
0
© Institute for Fiscal Studies
10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 160
Gross annual income (£000s)
Notes: Marginal rate of income tax and employee’s National Insurance Contributions.
Thresholds are expressed in 2014-15 prices using the CPI. Assumes employee
contracted into State Second Pension.
Income tax and employee NICS marginal rates
2015-16 (married, non-working spouse)
70%
Transferable allowance
withdrawn
60%
Marginal rate
50%
40%
30%
20%
Income tax allowance and
NI threshold delinked
10%
0%
0
© Institute for Fiscal Studies
10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 160
Gross annual income (£000s)
Notes: Marginal rate of income tax and employee’s National Insurance Contributions.
Thresholds are expressed in 2014-15 prices using the CPI. Assumes employee
contracted into State Second Pension.
Income tax and employee NICS marginal rates
2015-16 (married, non-working spouse)
70%
Transferable allowance
withdrawn
60%
Marginal rate
50%
40%
30%
20%
Income tax allowance and
NI threshold delinked
10%
Personal allowance
“withdrawn”
0%
0
© Institute for Fiscal Studies
10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 160
Gross annual income (£000s)
Notes: Marginal rate of income tax and employee’s National Insurance Contributions.
Thresholds are expressed in 2014-15 prices using the CPI. Assumes employee
contracted into State Second Pension.
Income tax and employee NICS marginal rates
2015-16 (married, non-working spouse, 2 children)
70%
60%
Marginal rate
50%
40%
30%
20%
10%
0%
0
© Institute for Fiscal Studies
10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 160
Gross annual income (£000s)
Notes: Marginal rate of income tax and employee’s National Insurance Contributions.
Thresholds are expressed in 2014-15 prices using the CPI. Assumes employee
contracted into State Second Pension.
Direct taxes
• The basic structure looked fairly straightforward in 2009
– Gone a bit downhill since then
• Note no adjustment for inflation of:
– Point at which child benefit is withdrawn
– Start of 60% marginal rate of income tax
– Start of 45% marginal rate of income tax
• Latter two have already fallen more than 12% on real terms
© Institute for Fiscal Studies
Direct taxes
• The basic structure looked fairly straightforward in 2009
– Gone a bit downhill since then
• Note no adjustment for inflation of:
– Point at which child benefit is withdrawn
– Start of 60% marginal rate of income tax
– Start of 45% marginal rate of income tax
• Latter two have already fallen more than 12% on real terms
• Over the longer term big increases in number of higher rate payers
© Institute for Fiscal Studies
Number of higher-rate taxpayers (millions)
6
5
4
3
2
1
0
1990-91
1995-96
2000-01
Note: includes additional-rate taxpayers
© Institute for Fiscal Studies
2005-06
2010-11
2015-16
Direct taxes
• The basic structure looked fairly straightforward in 2009
– Gone a bit downhill since then
• Note adjustment for inflation of:
– Point at which child benefit is withdrawn
– Start of 60% marginal rate of income tax
– Start of 45% marginal rate of income tax
• Latter two have already fallen more than 12% on real terms
• Over the longer term big increases in number of higher rate payers
• One for the really nerdy:
– Parameters in the employer NI system rise with the RPI
– Parameters in the employee NI system rise with the CPI
© Institute for Fiscal Studies
The continued neglect of NICs
• NICs are tax on earnings just like income tax
– Almost no relationship between payment and benefit entitlement
• Yet while income tax rates have fallen, NI rates have risen
– With (almost certainly) unintended consequences
© Institute for Fiscal Studies
Basic rate of income tax and main rates of NICs
since 1979
35%
Basic rate of income tax
Main employee NICs rate
30%
Main employer NICs rate
Marginal rate
25%
20%
15%
10%
5%
0%
1979-80 1984-85 1989-90 1994-95 1999-00 2004-05 2009-10
Fiscal year
© Institute for Fiscal Studies
Note: Between 1986-87 and 1998-99, the employer rate shown is that applying
at the UEL, while between 1986-87 and 1988-89 the employee rate shown is
that applying up to the UEL.
Total income tax and employee NICs rate by
income in 1978–79 and 2015–16
40%
Income tax and employee NICs
as a percentage of earnings
35%
30%
25%
20%
15%
10%
5%
0%
£0
£5,000 £10,000 £15,000 £20,000 £25,000 £30,000 £35,000 £40,000 £45,000 £50,000
Annual gross income
Age 65–74, 1978–79
© Institute for Fiscal Studies
Age under 65, 1978–79
Notes: Figures expressed in 2014–15 prices using the RPI. Assumes single man, no
children, all income earned for individual aged under 65, one job, contracted into
S2P/SERPS.
Total income tax and employee NICs rate by
income in 1978–79 and 2015–16
40%
Income tax and employee NICs
as a percentage of earnings
35%
30%
25%
20%
15%
10%
5%
0%
£0
£5,000 £10,000 £15,000 £20,000 £25,000 £30,000 £35,000 £40,000 £45,000 £50,000
Annual gross income
© Institute for Fiscal Studies
Age 65–74, 1978–79
Age under 65, 1978–79
Age 65–74, 2015–16
Age under 65, 2015-16
Notes: Figures expressed in 2014–15 prices using the RPI. Assumes single man, no
children, all income earned for individual aged under 65, one job, contracted into
S2P/SERPS.
Taxation of savings and capital
• Lies at the heart of the tax system
• Often a tension between desire to tax returns:
– Less heavily than earnings to encourage savings/investment
– As heavily as earnings to prevent avoidance
• But no need for the incoherence this has created
– notably in CGT
© Institute for Fiscal Studies
Contribution required to match an ISA
130
120
110
100
20% taxpayer
90
80
70
60
ISA
© Institute for Fiscal Studies
Cash
Pension Pension
(emp'ee) (emp'er)
OOH
Rental
house
Equities
Contribution required to match an ISA
130
120
110
100
20% taxpayer
40% taxpayer
90
80
70
60
ISA
© Institute for Fiscal Studies
Cash
Pension Pension
(emp'ee) (emp'er)
OOH
Rental
house
Equities
Pensions
• If any area of the tax system requires stability, clarity and a
coherent sense of direction it’s the taxation of pensions
– We have none of these
© Institute for Fiscal Studies
Pensions
• If any area of the tax system requires stability, clarity and a
coherent sense of direction it’s the taxation of pensions
– We have none of these
• Continual reductions in the most coherent parts of the system –
annual and lifetime allowances
– No sense of where this will end
© Institute for Fiscal Studies
Pensions
• If any area of the tax system requires stability, clarity and a
coherent sense of direction it’s the taxation of pensions
– We have none of these
• Continual reductions in the most coherent parts of the system –
annual and lifetime allowances
– No sense of where this will end
• No action on the excessively generous bits
– NI treatment of employer contributions
– Tax free lump sum
© Institute for Fiscal Studies
Pensions
• If any area of the tax system requires stability, clarity and a
coherent sense of direction it’s the taxation of pensions
– We have none of these
• Continual reductions in the most coherent parts of the system –
annual and lifetime allowances
– No sense of where this will end
• No action on the excessively generous bits
– NI treatment of employer contributions
– Tax free lump sum
• Whatever the merits of the announcement in this year’s Budget
– Is this a good way to make tax (or pension) policy?
© Institute for Fiscal Studies
Indirect taxes
• VAT rates have risen over 30 years to 15%, then 17.5%, now 20%
– But little or no policy direction
• We have among the narrowest VAT bases in the OECD
– And extending it to pasties is no great move towards coherence
• Though certainly not a move away
© Institute for Fiscal Studies
VAT on food?
Products currently facing 20% VAT
Cereal, muesli and similar sweet-tasting bars
Potato crisps
Marshmallow snowballs with no biscuit base
Chocolate bars that are ‘eaten with fingers’
Sweet-tasting dried fruit for snacking
Chocolate buttons not for use in baking
Frozen yoghurt and ice cream
Gingerbread men decorated with chocolate
© Institute for Fiscal Studies
VAT on food?
Products currently facing 20% VAT
Products currently facing 0% VAT
Cereal, muesli and similar sweet-tasting bars
Flapjacks
Potato crisps
Other roasted vegetable chips, tortilla chips
Marshmallow snowballs with no biscuit base
Marshmallow teacakes with a biscuit base
Chocolate bars that are ‘eaten with fingers’
Chocolate body paint
Sweet-tasting dried fruit for snacking
Sweet-tasting dried fruit for home baking
Chocolate buttons not for use in baking
Chocolate mini-buttons for use in baking
Frozen yoghurt and ice cream
Baked Alaska
Gingerbread men decorated with chocolate
Gingerbread men on which the chocolate
amounts to no more than two dots for eyes
© Institute for Fiscal Studies
Indirect taxes
• VAT rates have risen over 30 years to 15%, then 17.5%, now 20%
– But little or no policy direction
• We have among the narrowest VAT bases in the OECD
– And extending it to pasties is no great move towards coherence
• Though certainly not a move away
• On road fuel duties it would seem this government has had a
consistent policy to reduce them
– At a cost of £5 billion a year relative to inherited plans
© Institute for Fiscal Studies
Real duty on a litre of petrol
Pence, April 2013 prices
Pence per litre (April 2014 prices)
75
70
65
60
Plans inherited
55
Note: Pence per litre uprated to Apr 2014 prices using the RPI.
© Institute for Fiscal Studies
Coalition (post-Budget 2014)
Indirect taxes
• VAT rates have risen over 30 years to 15%, then 17.5%, now 20%
– But little or no policy direction
• We have among the narrowest VAT bases in the OECD
– And extending it to pasties is no great move towards coherence
• Though certainly not a move away
• On road fuel duties it would seem this government has had a
consistent policy to reduce them
– At a cost of £5 billion a year relative to inherited plans
• Looks less coherent when you see how policy was actually made
© Institute for Fiscal Studies
Fuel duties: to uprate or not to uprate, Acts I to VI
Dates due
before Budget
2011
Budget
2011
AS 2011
June 2012
AS 2012
Budget
2013
AS 2013
Apr 2011
Jan 2012
Aug 2012
Jan 2013
Cancelled
Cancelled
Cancelled
Apr 2012
Aug 2012
Cancelled
Cancelled
Cancelled
Cancelled
Cancelled
Apr 2013
Apr 2013
Apr 2013
Apr 2013
Sep 2013
Cancelled
Cancelled
Apr 2014
Apr 2014
Apr 2014
Apr 2014
Sep 2014
Sep 2014
Cancelled
Apr 2015
Apr 2015
Apr 2015
Apr 2015
Sep 2015
Sep 2015
Sep 2015
Apr 2016
Apr 2016
Apr 2016
Apr 2016
Apr 2016
Apr 2016
Apr 2016
© Institute for Fiscal Studies
Environmental taxes
• May be newer but they are just as messed up as the rest of the
system
© Institute for Fiscal Studies
Implicit carbon prices in 2013 and 2020
140
Gas 2013
120
Implicit carbon price (£/tCO2e)
Electricity 2013
100
80
60
40
20
0
-20
-40
Households
© Institute for Fiscal Studies
Small business
Medium business
Large energy
intensive business
Implicit carbon prices in 2013 and 2020
140
Gas 2020
Gas 2013
Electricity 2020
Electricity 2013
Implicit carbon price (£/tCO2e)
120
100
80
60
40
20
0
-20
-40
Households
© Institute for Fiscal Studies
Small business
Medium business
Large energy
intensive business
Environmental taxes
• May be newer but they are just as messed up as the rest of the
system
• Carbon Price Support Rate (CPSR)
– CPSR introduced in April 2013 to ‘top up’ the EU Emission Trading
Scheme carbon price to meet the Carbon Price Floor (CPF) set by the
government
– applies to all UK generators of fossil-fuel-based electricity
• Introduced in Budget 2013 with a clear trajectory to create
certainty for investors
– Which was undone in Budget 2014
© Institute for Fiscal Studies
Carbon Price Support Rate (CPSR)
30
£ per tonne CO2 (2013 prices)
Carbon Price Floor
25
EUA price (forecast)
Carbon Price Support Rate
20
15
10
5
0
2013
© Institute for Fiscal Studies
2014
2015
2016
2017
2018
Carbon Price Support Rate (CPSR)
30
£ per tonne CO2 (2013 prices)
Carbon Price Floor
25
EUA price (forecast)
Carbon Price Support Rate
20
CPSR (Post-Budget)
CPF (Post-Budget)
15
10
5
0
2013
© Institute for Fiscal Studies
2014
2015
2016
2017
2018
Housing
• Council tax is deliberately regressive
– In charging a lower rate of tax on higher value properties
• It is still based on 1991 values
• What is its future after several years of freezes?
© Institute for Fiscal Studies
Housing
• Council tax is deliberately regressive
– In charging a lower rate of tax on higher value properties
• It is still based on 1991 values
• What is its future after several years of freezes?
• Stamp duty is one of the worst and most distorting of all our taxes
– Its slab structure means a £1 increase in sale price can add £40,000 to
the tax bill
– It discourages transactions
– Yet it has been ratcheted up time and again
© Institute for Fiscal Studies
The increase in stamp duty rates
£200,000
May 1997
£180,000
Stamp duty liability
£160,000
£140,000
£120,000
£100,000
£80,000
£60,000
£40,000
£20,000
£0
£0
£500,000
£1,000,000
£1,500,000
Sale price
© Institute for Fiscal Studies
£2,000,000
£2,500,000
The increase in stamp duty rates
£200,000
May 2013
£180,000
May 1997
Stamp duty liability
£160,000
£140,000
£120,000
£100,000
£80,000
£60,000
£40,000
£20,000
£0
£0
£500,000
£1,000,000
£1,500,000
Sale price
© Institute for Fiscal Studies
£2,000,000
£2,500,000
Business taxation
• A series of reforms which will have made UK CT system more
internationally “competitive”
– Big and consistent cuts to headline rate of CT
– Reforms to CFC regime
– Move to territorial regime under last government
– Introduction of Patent Box
• Working with OECD on BEPS
© Institute for Fiscal Studies
Business taxation
• A series of reforms which will have made UK CT system more
internationally “competitive”
– Big and consistent cuts to headline rate of CT
– Reforms to CFC regime
– Move to territorial regime under last government
– Introduction of Patent Box
• Working with OECD on BEPS
• But, even within the confines of source based, taxation:
– Continued reduction in investment allowances not optimal
– Absurd degree of inconsistency in Annual Investment Allowance
© Institute for Fiscal Studies
Annual Investment Allowance (AIA)
500,000
Annual limit for AIA, £
AIA limit
400,000
300,000
200,000
100,000
© Institute for Fiscal Studies
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
0
Annual Investment Allowance (AIA)
Annual limit for AIA, £
500,000
AIA limit
Budget 2014
400,000
300,000
200,000
100,000
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
0
• AIA set at £250,000 for 1 Jan 2013 – 31 Dec 2014. Would have
returned to £25,000 in January 2015. Now £500,000 from April 2014
to end of 2015
© Institute for Fiscal Studies
Business taxation
• A series of reforms which will have made UK CT system more
internationally “competitive”
– Big and consistent cuts to headline rate of CT
– Reforms to CFC regime
– Move to territorial regime under last government
– Introduction of Patent Box
• Working with OECD on BEPS
• But, even within the confines of source based, taxation:
– Continued reduction in investment allowances not optimal
– Absurd degree of inconsistency in Annual Investment Allowance
– Problems in design of the Patent Box
© Institute for Fiscal Studies
In conclusion
• This matters, hugely
• £4 out of every £10 generated in the economy is taken in tax
– Doing that as efficiently as possible can raise incomes, welfare and
growth
© Institute for Fiscal Studies
In conclusion
• This matters, hugely
• £4 out of every £10 generated in the economy is taken in tax
– Doing that as efficiently as possible can raise incomes, welfare and
growth
• But is it feasible?
– Would more coherent policy, perhaps fatally, reduce compliance?
© Institute for Fiscal Studies
In conclusion
• This matters, hugely
• £4 out of every £10 generated in the economy is taken in tax
– Doing that as efficiently as possible can raise incomes, welfare and
growth
• But is it feasible?
– Would more coherent policy, perhaps fatally, reduce compliance?
• Or is this simply a political failure?
© Institute for Fiscal Studies
Lord Lamont:
[The 1992 Budget] was the most political of all
my budgets, and it completely wrong-footed
Labour, who were not sure whether to oppose
or support a low rate band, because of its
appearance of help for the lower paid. Looking
back on it, it was not a very good budget. But it
did help us to win the 1992 election. My next
budget, my third budget, helped to lose the
1997 election for the Conservatives, but it was
definitely my best budget.
© Institute for Fiscal Studies
In conclusion
• This matters, hugely
• £4 out of every £10 generated in the economy is taken in tax
– Doing that as efficiently as possible can raise incomes, welfare and
growth
• But is it feasible?
– Would more coherent policy, perhaps fatally, reduce compliance?
• Or is this simply a political failure?
• We can do better
© Institute for Fiscal Studies