Reflections on the wider tax regime, at APPG Brexit debate

29 Jun 2018

A discussion on tax after Brexit became an opportunity for general reflections on the tax system and potential future reforms, at the latest meeting of the All-Party Parliamentary Group on Responsible Tax.

Both speakers, former Labour leader Ed Miliband and Conservative peer David Willetts, agreed that taxes would have to rise to meet the needs of public services, and both thought the Government’s manifesto promise to cut corporation tax to 17 per cent would and should be abandoned. 

In addition to the speakers, parliamentarians in attendance included Margaret Hodge MP (chairing the event), Shadow Treasury Minister Anneliese Dodds MP, Nigel Mills MP, Caroline Flint MP (both vice chairs of the group), Lord Harries (former Bishop of Oxford), Baroness Howe and Lord Low of Dalston. 

Opening the debate Ed Miliband set out what saw as the key objectives for reform of the tax system. These were: 

  • Ending the ‘loopholes and dodges’ in the system 
  • Implementing the principle that, however you make money it should be taxed in a similar way 
  • Making the system more progressive  
  • Deciding what the correct rate of corporation tax should be 
  • Raising adequate resources for public spending 

On the second of these points, George Crozier, of CIOT, contributing from the floor, observed that while there was broad support for the principle that ‘however you make money it should be taxed in a similar way’ the backlash and eventual u-turn around the increase in national insurance for the self-employed announced in the March 2017 Budget showed the practical challenges in implementing this. Miliband acknowledged this though he thought that a ‘lack of pitch rolling’ had been at fault on this occasion. He thought Gordon Brown’s 1p increase in national insurance for the NHS in 2001 was an example of when this had been done better. 

On the third point, the progressivity of the tax system, Miliband argued that the system does not currently have progressivity, with the top and bottom fifths paying about the same proportion of their income in tax. This was a point also touched on by Anneliese Dodds who said the system had become much less redistributive in recent years. Following cuts in top income tax rates, and in corporation and capital taxes, the lowest decile were now paying proportionately more, she said. 

However, David Willetts cautiously challenged the assertions of the two Labour MPs, telling the meeting that the top one per cent of earners pay 28 per cent of income tax, while the top 10 per cent pay 59 per cent of income tax. Add in other taxes and the top 10 per cent still pay 34 per cent of tax, he said. Increasing the progressivity of the system was not necessarily simple, he said, noting that indirect taxes with wide support such as duties on tobacco and alcohol are regressive. 

There was a degree of consensus on what should happen to corporation tax. While neither of the lead speakers was an enthusiastic advocate of a higher CT rate both thought broadly both that the Government’s pledge of a 17 per cent rate would be dropped, and that it would not be missed. “Is going to 17 per cent rate right or important?” asked Miliband, leaving his response implied. When a questioner from the PCS Union suggested that CT could be raised back up to 25-26 per cent without driving business away, Willetts demurred, citing business uncertainty already in place due to Brexit. “I would be wary of raising it beyond 20 percent,” he said. “In a post-Brexit environment, where you’ve got internationally mobile companies saying, ‘Why the hell should we stay in Britain?’ I really don’t think Brexit gives us the opportunity of substantial increases in company taxes.” However he did think government could “get away with not lowering corporation tax”. It was ‘a modest bet’ that at least 1p of the proposed cut will go. It was noted that the cut to 17 per cent has been legislated for so further legislation would be needed to reverse it. However, the consensus was that while this might spark a small rebellion on the Conservative benches it was inconceivable that Labour would not support it so it would pass easily. Anneliese Dodds endorsed this view, reminding the meeting that Labour was already committed to opposing and if necessary reversing the cuts. Miliband added later that he thought mobility in relation to corporation tax was in large part profit shifting. 

On the funding of public services, Miliband said, with reference to the debate on raising tax to increase funding for the NHS, that it was to the Government’s credit that they were now talking about this, though the suggestions so far were ‘not enough’.  

Willetts observed that, by 2040, estimates were that an additional £63 billion a year of spending would be needed to meet public expectations. The debate on tax increases to fund the NHS was, he thought, a classic example of how policy debates would pan out in the future. We can’t just borrow the money, he said. Tax rises would be needed. However he warned his audience to avoid attractively simplistic solutions. The left think all government’s money problems can be solved by hitting big business, especially the banks. Some on the right attribute the same magic effects to reducing immigration, he continued. Realistically, ‘all must pay’ for better public services. However the focus should be on pensioners and the asset rich, he argued, pointing to proposals in a recent report from the Resolution Foundation (which he chairs). Don’t just impose tax on the younger generation, was his plea. Nevertheless, he was critical of one tax cut which had benefited people of working age over recent years, describing the raising of the personal allowance as ‘popular but unwise’. He observed that government would have balanced the budget without it! 

Another issue raised by Miliband in his remarks was the effectiveness of entrepreneurs’ relief. This was picked up later in remarks from the floor with CIOT’s Crozier telling the meeting that some CIOT members had suggested that a problem with entrepreneurs’ relief is that it incentivises entrepreneurs to sell up before their firms can get really big, and that might be a factor in the UK’s failure to produce a British ‘tech titan’. The suggestion had been made that shifting the focus to incentivising growth by, say, making it easier for firms to take on their first few employees through more generous relief from national insurance, might be an alternative. 

Despite the title of the debate (“What Brexit means for tax”) Brexit played relatively little part in the discussion. Miliband did frame his objectives (see above) in the context of the Brexit referendum, arguing that a perception that the tax system is unfair contributed to the public dissatisfaction which led to the vote to leave the EU. He worried that Parliament and the media were obsessed with ‘the weeds’ of the Brexit negotiations, to the exclusion of looking at why the vote to leave happened. Public dissatisfaction was not being addressed, and meanwhile a perception was growing that Brexit was being run for ‘the set of people at the top’. 

Willetts said that he thought the main effect of Brexit on the tax system would be to enhance the fiscal crisis facing the state, leading him to his points (see above) about the need for further tax increases. Hodge said that Brexit was an opportunity for reform, however Lord Low observed that, based on the debate so far, it didn’t seem like Brexit would provide much opportunity for that, at least not of the positive kind. Willetts was in agreement, describing Brexit as a ‘slow motion economic car crash’. 

Willetts did, however, put forward one specific example of how the increased ‘room for manoeuvre on tax’ post-Brexit could be used. He said he sits on the board of the Francis Crick Institute. Under VAT rules publicly funded research institutes such as the Crick Institute are exempt from VAT, while commercial ones are not. However the boundary, set by EU-wide rules, is five-10 per cent of revenue from commercial sources. As a result the institute cannott open itself up as an incubator to small firms as this would expose it to massive VAT cost. He thought there might be (and certainly ought to be) room for change post-Brexit. 

Wider international themes were mentioned briefly. A Labour councillor wondered whether, post-Brexit, the UK’s crown dependencies and overseas territories (CDOTs), and potentially even the UK itself, could end up on the EU’s blacklist of ‘tax havens’. Margaret Hodge suggested it was only the UK’s membership of the EU that had kept CDOTs off the EU’s blacklist. CIOT’s Crozier observed that the big tension in international tax is between competition and co-operation. Over the last few years, Brexit notwithstanding, he thought there were signs that co-operation might be moving into the ascendancy. As well as the productive work under BEPS and the Common Reporting Standard he pointed to the UK’s qualified support, indicated in the latest taxation of the digital economy consultative document, for the EU’s work in this area developing a revenue-based tax. Miliband responded that this was an interesting question. He hoped the suggestion that co-operation was increasing was right. 

Inheritance tax was another topic raised, with Lord Harries asking about the likelihood of reform in this area. Willetts said the 40 per cent rate causes ‘awful problems’. He would support a lower rate on a broader base. A tax adviser, who described herself as an inheritance tax planner, said that inheritance tax was effectively a voluntary tax. She backed Willetts in calling for the rate to be brought down. 

Hodge posed a question from the chair about hypothecation. Miliband said he was a ‘soft hypothecation’ person – that is, politicians should be happy to say, for example, “we’re raising national insurance to spend more on the NHS”, but tying expenditure in particular areas to the revenue raised by particular taxes was problematic. Willetts said he increasingly thought the contributory principle was very important in tax and benefit matters. 

Caroline Flint MP commented that she was getting an increasing amount of casework about pensions and annuities. She also suggested simplification was key and should be much more at the heart of the tax agenda. 

Finally, Nigel Mills said he saw a challenge for the tax system in that we will ‘run out of sins’ to tax at some point, with tobacco and fossil fuel use in decline. Separately, he said he was sympathetic to the idea of flexibility on regional taxation – for example different VAT rates on tourism in different parts of the UK, including different English regions. 

You can read further coverage of the event at Bloomberg Tax and Public Finance

By George Crozier