Think tanks are an important part of the tax policy process. Operating outside of political parties (though often with close affiliations to a particular party or wing of it) they have more licence to engage in free-thinking and to float radical new ideas, starting a debate before politicians are committed to a particular proposal. Keeping up with what well-connected think-tanks are advocating is a help in anticipating what a party, or even the government, may be thinking before it has been announced, especially as there is something of a ‘revolving door’ between the world of think-tanks and that of political advisers to ministers and their opposition counterparts.
Here is a summary of recent (and some not so recent, but still relevant) tax proposals to come out of think tanks.
Centre for Policy Studies (CPS)
The After the Virus report by Sajid Javid MP and the CPS said that the Government’s immediate priority should be to prioritise growth, rather than ‘derail the recovery with tax rises or spending cuts’. They suggest a new fiscal rule in which the Government brings the current budget into balance within three years, but only when a stable recovery has been achieved. The recommendations include significantly reducing the cost of hiring by cutting employer’s National Insurance, a review of the UK tax system, aimed at delivering a ‘moderate increase’ in revenue over the medium-term through improved incentives and higher growth and switching away from pension tax relief based on marginal rates to a flat bonus paid on contributions, regardless of your tax code. The report also calls for a council tax revaluation, with reviews every three years, reforming bands and rates to make them fairer.
The last CPS report to focus on wider tax reform was Make Work Pay in November 2018. This proposed reforms to ensure that “whoever you are, whatever your situation, you keep the majority of every extra pound you earn”. This included:
- A combined threshold for income tax and employee National Insurance contributions set at £12,000.
- Significant changes to Universal Credit, which would see the rate at which benefits are withdrawn post-tax slashed to 50p;
- Roll the marriage allowance into a new family responsibility allowance, which would allow married couples with young children or significant care responsibilities to transfer a capped amount of unused personal allowance from the lower-earning to the higher-earning partner;
- Reform the high income child benefit charge, so that it is levied at a rate of £7 per £100 earned over £50,000;
- The withdrawal of the personal allowance should be abolished, and the additional rate threshold reduced from £150,000 to £100,000.
Institute for Government (IfG)
The IfG’s Overcoming the barriers to tax reform report argues that the PM and Chancellor should be setting clear objectives for the tax system; for the Government establishing a tax commission; for the Treasury and HMRC (with the support of ministers) working to build a stronger evidence base for tax reform; that the Treasury should do more to build public understanding of the need for tax reform; and that the Treasury Select Committee should spend more time looking at the tax system.
In a separate COVID-19 report, the IfG urges the Government to set out new tests which explain how it will balance economic and health concerns against each other in lifting the restrictions. The paper also recommends introducing encouragement and incentives, such as tax incentives or reducing support for furloughed workers, to bring people and businesses out of lockdown.
Institute for Fiscal Studies (IFS)
Primarily a research and analysis institute, the IFS does also make policy recommendations, hence its inclusion here. The IFS said a temporary VAT cut could help stimulate the economy hit by COVID-19, but only if timed correctly. If a cut is enacted, its expiration should be timed to coincide with, or made conditional on, a return to sustained economic growth, so as not to ‘choke off a nascent recovery’, it says. The organisation has said that the tax policy response to coronavirus should aim at providing targeted support not broad-based stimulus, at least for now.
In a separate article, IFS’ Stuart Adam and Helen Miller suggested the easiest sell post-COVID-19 crisis would be to raise class 4 NICs to 12 per cent. This would still leave a big tax advantage for the self-employed as they would still face no equivalent of employer NICs. IFS said that concerns that business rates are killing the high street are ‘vastly overblown’. If we removed all business rates then, after a period of adjustment, rents would be higher and the total cost of premises little changed. After the crisis, we need to move away from temporary reliefs and look to reform business rates properly: not simply the level of the tax, but, for example, how that level should change as rents do, and how to reduce the disincentives the existing system creates to develop and invest in business property. On benefits, the IFS said raising or removing the benefit cap so that all working age benefit recipients can benefit from the temporary increase in support would make sense, at least while the current social distancing requirements are in place.
In March, IFS looked at soda taxes. It found soda taxes are relatively effective at targeting the sugar intake of the young, are less successful at targeting the intake of those with high total dietary sugar and are unlikely to be strongly regressive especially if consumers benefit from averted internalities.
Institute for Public Policy Research (IPPR)
The IPPR published a major report in July on transforming the economy after COVID-19 in which they argue for an investment-led economic recovery focused on job-creation and creating opportunity across the country, decarbonisation and restoring nature, and tackling inequality. Among the recommendations is to invest in research and development to drive innovation. There should be a focus on new start-ups and small and medium-sized enterprises, with consideration of equity stakes for government to share the proceeds of success. In the medium term, after the recovery is achieved, public finances will need to be stabilised through a ‘clear fiscal framework and fair taxation’. The report says the UK government, devolved nations and local government should review and audit all projects, policy, investment and spending, taxation measures, regulations and legislation to ensure they are in line with the UK’s obligations under the Paris Agreement and net zero commitments.
IPPR research finds that austerity has had a disproportionately damaging impact upon the North of England’s resilience and its capacity to deal with the social and economic impacts of the COVID-19 pandemic. The think tank calls for investment in the North and spades in the ground to protect and create jobs, and to build a greener, more just economy that makes the most of the potential and opportunities of the North. What we need is an investment programme and action, rather than empty rhetoric on ‘levelling up’, it says.
In a letter to PM Boris Johnson, the IPPR called for a ‘new deal’ post-COVID-19 that prioritises what matters most to ordinary people: their pay, their taxes, the natural world around them, and equality within their communities. This includes an end to artificial tax avoidance arrangements and tax haven structures, publicly disclose where profits are made and who benefits, and publish their tax policy. It also calls for the new deal to prioritise job retention and make a commitment to fair pay and restrict the gap between the least and the most paid.
The final report of the IPPR’s Commission on Economic Justice, published in September 2018, had a significant impact on Labour’s economic thinking under Corbyn and McDonnell, and remains influential. So it is worth reminding ourselves what is in the report. It is, of course wide-ranging, but on tax its recommendations include:
- Combining the rates and allowances for employee NICs and income tax into a single tax schedule, and applying them to all incomes on an individual, annual basis, while replacing the present system of marginal tax bands with a formula-based system, applying a gradually rising marginal rate of tax as incomes rise
- All income, whether from work or from wealth, should be taxed in the same way, abolishing capital gains tax and the separate rates of tax on dividends, and incorporating income from dividends and capital gains into the income tax schedule (though retaining the exemption from CGT for first homes)
- Abolishing inheritance tax, and replacing it with a lifetime gifts tax levied on the recipient, with a lifetime allowance of around £125,000
- Replacing business rates by a new land value tax on all non-residential land, calculated on the basis of the land’s ‘optimum use’ under existing planning permission, not its current use
- Increasing corporation tax to 24 per cent, while simplifying the system of reliefs and allowances to increase the tax base
- Introducing an Alternative Minimum Corporation Tax (AMCT) as a ‘backstop tax’ levied on multinational corporations which consistently report low profits in the UK and are unable to show these are genuine. It would be levied on the company’s UK sales at a rate derived from its global profits relative to global sales
- The phasing down and eventual abolition of R&D tax credits other than for SME firms younger than seven years old, and the phasing down and abolition of the patent box. The money released should be channelled into direct funding for innovation through Innovate UK and the National Investment Bank.
Institute for Economic Affairs (IEA)
The IEA published a report in June titled How the UK economy can recover from coronavirus which claimed if markets are liberalised and allowed to operate freely as we emerge from lockdown, the COVID-19 recovery may be quicker than many think, as was the case in West Germany after the war. There could also be a fundamental rethink of planned increases in the National Living Wage. One way of rebuilding a prosperous economy that benefits everybody, especially those ‘left behind’, is to restore full employment, not to price workers out of a job or disincentivise them from seeking work, says the report. The IEA also suggests higher taxes on individuals and corporations could slow the recovery. The fiscal costs of the crisis at least could be manageable without the need for tax increases, or ‘Austerity 2.0’, they argue.
Separately, the IEA says there is a pressing need for those who are sceptical of both universal basic income and universal basic services to come up with not only criticisms and objections but their own ideas for reform, however radical. The IEA claims any bespoke ‘Mansion Tax’ is principally a political gesture. There is no need to make an already complex system of inconsistent local property taxes more so, it says. Additional council tax bands, locally applied, make the most sense in respect of other government priorities, but will not address the issues arising from the reluctance of any government to revalue the properties. Other schemes might be better than either and speak to the need to move cautiously based on a more comprehensive review of what local taxation is trying to achieve.
New Economics Foundation (NEF)
The NEF says the benefits system needs reform now more than ever, claiming the broader social security system, including universal credit, has been broken for many years due to both system design flaws and the subsequent cuts introduced over many years. NEF proposes the abolition of the benefit cap and an immediate increase to the generosity of payments, through a Minimum Income Guarantee (MIG). This is a payment of £221 per person per week (around 70 per cent of minimum wage income) to cover living costs excluding rent, mortgage, and childcare costs. The MIG would be: based on need and available to everyone who applies for it; not be means-tested for new claimants at the point of access, thus preventing delays to much needed payments; and payments would be made quickly through the advanced payment system of universal credit, without the need for repayments out of future universal credit entitlements. The think tank also proposes new legislation for a rent and mortgage holiday (not deferral) because of impact of COVID-19, and forthcoming proposals will set out reforms to childcare delivery and fees. Under MIG, all existing universal credit claimants would have the main element of their support topped up to reach this amount.
Elsewhere and pre-COVID-19, the NEF looked at how to empower ‘the gig economy’. Its recommendations of access to an adequate social security safety net, and collective bargaining among self-employed workers, are ‘more pressing than ever’. NEF supports the Association of Independent Professionals and the Self-Employed (IPSE) policy recommendations for improving access to pensions for the self-employed, including developing a sidecar pension scheme which divides contributions between a pension and a rainy-day fund, and tax relief for lower-income self-employed workers saving for pensions. NEF also supports models of strong trade unions for self-employed workers supporting their members through pension schemes. There is a precedent for this in other countries, where unions see it as one of the ‘most vital’ parts of their role.
Onward argues that the extraordinary nature of the pandemic and the UK’s longstanding structural weaknesses demand a radical and urgent response from the Chancellor. It calls for sweeping tax reform now to ensure borrowing is brought under control equitably and without harming growth. This means reviewing the ‘1,100 tax reliefs’ that exist, focusing tax rises on accrued wealth, including by revaluing council tax, removing distortions in the tax system, for example those that favour large digital firms, and announcing a long-term review of the tax treatment of debt and equity financing. Any immediate tax cuts should be focused on cutting the cost of employment through reducing the burden of employer NICs, rather than a VAT cut aimed at boosting consumption. Onward also argues for the introduction of new fiscal rules that delay the Conservative Manifesto pledge to have debt falling as a share of GDP to 2024, but maintaining the Government’s commitment to keep debt interest below six per cent of GDP.
Onward’s Paying it forward report this week explores different ways to reduce the negative impact of growing corporate debt accumulation on the recovery and argues for a new scheme, New Start, under which HMRC would allow firms to pay down their government-issued debt over a long period, through a surcharge on taxable profits and shareholder salaries, rather than over the next few years when investment and growth are more of a priority than deleveraging. Under this arrangement, firms would only pay when they became profitable again, much like under the existing student loan system for tuition fees. This scheme allows loans to be paid back through taxes on profits would provide the economic flexibility and administrative efficiency needed to overcome this crisis, maximising taxpayer value for money at the same time.
In a report published in early March Politeia said that government spending and tax burdens are already high by historic standards, especially given that the economy is at near full employment. It argued this was crowding out private activity and the tax base and slashing potential future growth in the longer term. There is also the ‘political business cycle’ issue that governments normally like to retrench on the expenditure side immediately after the election in order to be able to ease up ahead of the following poll, it says. The Boris Johnson administration appeared to be intending ‘instant political gratification now’, at the risk of a potential fiscal stabilisation crisis a year or two from the next election, it thought. The main conclusion (pre-Covid of course) was that there is already a grave need for fiscal stabilisation, even without the prospective further diminution of responsible parsimony from now on.
The Resolution Foundation published a report on capital gains tax which found that ignoring capital gains in statistics about the UK income distribution means we underestimate the share of income going to the top. The Foundation suggests the ONS should seek to add a supplementary ‘Including Irregular Income’ measure of household income to its statistics about the income distribution and to its microdata. This data should include (at least) taxable capital gains, irregular pension withdrawals, and inheritances and (large) gifts.
While much depends on the progress in fighting the virus and in finding a long-term solution, the fact that even in the central scenario unemployment returns to levels not seen since the 1980s illustrates the importance of policy measures to reduce that rise in unemployment, says the Foundation. While the large-scale, targeted measures needed to achieve that would be expensive, the analysis from the OBR illustrates that the Government can afford to take them, as long as the costs of servicing those debts remains low.
On benefits, the think tank assessed the welfare system and its effect on living standards during the coronavirus epidemic in a report. The Government must ensure that there are sufficient DWP staff and resources to continue to prioritise the processing of new claims, especially given the likelihood of a second spike as the CJRS phases out. It says limit or suspend the capital rules in universal credit that prevent those with more than £16,000 in savings from receiving any means-tested benefits, extend the emergency £20 a week increase to the ‘new style’, contributory Jobseeker’s Allowance and Employment and Support Allowance and commit to continuing the enhanced universal credit and Local Housing Allowance entitlements beyond the end of the current financial year. It also calls for a further increase to universal credit entitlements for couples and those with children, reflecting their greater needs over single adults, if the length of the crisis means this is needed to avoid widespread hardship.
Social Market Foundation (SMF)
The SMF said policymakers should develop a new Jobs Guarantee Scheme to ensure that the newly unemployed are not left inactive, but instead given jobs, with training, that pay the National Living Wage. A new scheme should be devised in line with the following principles: training must be a central element; private sector placements should be the priority; fill the low-carbon skills gap; and the scheme should be managed at a regional level.
In a separate report, the SMF says businesses should agree a ‘new social contract’ on improved tax compliance, treatment of workers and support for communities in exchange for emergency support during the coronavirus crisis. New forms of tax reporting should be devised, offering far greater transparency about the effective tax rates faced and payments made by business. League tables and other disclosure devices to benchmark appropriately comparable firms’ tax compliance and contribution should be considered. Commercial information providers such as PwC have demonstrated what can be done here, with projects such as the annual Total Tax Contribution report. HMRC should supply relevant data to the social contract commission’s successor body, for the compilation of benchmarking reports on the taxation of larger companies, both publicly-traded and privately-owned. The SMF claims a strong norm around tax contributions, supported with clear and authoritative public disclosure, could, in time, become a potential commercial advantage for public-facing business.
TaxPayers’ Alliance (TPA)
The campaign group / think tank Taxpayers’ Alliance continues to favour abolishing inheritance tax entirely. In the meantime, it calls for a removal of the residential property distortion by raising the standard threshold to match it (from £325,000 to £500,000) and halving the rate to 20 per cent. All taxes on income (including national insurance, capital gains tax and corporation tax) should be replaced over time with a single tax on all income at a single rate of 30 per cent, it argues. The Alliance says in the meantime national insurance should be renamed to reflect its genuine tax function, rules on the basis of the charges and expenses and earnings definitions should be aligned with those which apply to income tax and both rates should be cut first to 11 per cent and then 10 per cent. The starting age for employee national insurance should be raised from 16 to at least 26, too.
The TPA is against any increase to VAT, wants to scrap the higher 20 per cent rate and the 18 and 28 per cent rates on residential property to simplify the system and then eventually abolish capital gains tax entirely when possible. It wants stamp duty abolished, and undertook some research that found an SDLT threshold of £500,000 would have resulted in an estimated 216,000 more transactions last year, equivalent to a 27 per cent increase on existing transactions worth over £125,000. Most of these recommendations were first proposed by TPA in the 2012 report of its 2020 Tax Commission.