Tax ‘tipping into a negative’ for potential UK investors, MPs hear

The sessions, which are not part of a wider inquiry and are not expected to lead directly to a report, also explored an online sales tax, whether tax cuts would be inflationary or disinflationary and whether government revenue could be increased by a reduction in taxation.

Commenting ahead of the session, committee chair Mel Stride said: “With the UK’s tax burden about to increase to levels not seen since the end of the second world war, we are investigating whether the UK’s tax burden is too high, and what can be done to reduce it. We want to know whether the Chancellor’s ambition to cut taxes before the end of this parliament is achievable, which taxes could be reduced and whether a reduction in taxation could in fact increase government revenues.”

Witnesses in the first session: Rhiannon Kinghall Were, Head of Tax Policy at Macfarlanes LLP, Stuart Adam, Senior Research Economist at Institute for Fiscal Studies (IFS), Professor Stephen Millard, Deputy Director for Macroeconomic Policy at the National Institute of Economic and Social Research (NIESR), and Jon Richardson, Head of Tax Policy at PwC.

Future tax cuts

Committee chair Mel Stride, Conservative, wondered how the Chancellor can possibly hope to cut taxes by the next General Election. Professor Stephen Millard said it depends on what you think is ‘a sustainable fiscal position’, adding that although there seems fiscal room because net debt is coming down it would not take much for the room suddenly to vanish, such as interest rates going up. He also said taxes going up and down every two years does not provide stability for businesspeople and households. He added: “Raising the [Health and Social Care] levy that is coming in next year, deciding to reverse it for a year and it possibly coming back, again, does not strike me as the most sensible thing to do.” Millard complained that the Government’s fiscal targets seem to keep getting ‘reset’ and the UK needs a fiscal target that is predictable, stable and brings the debt down over time.

Anthony Browne, Conservative, asked if there a risk that the current level of taxation will damage the economy? Millard replied that once MPs have decided on the level of government spending, it is important that it is financed in a way that is the least distortionary possible, in terms of people’s behaviour and distortions about the future such as taxes on investment, because they could affect future GDP growth. Separately, he said to the extent that we know certain things add to growth, you would not want to tax them. Stuart Adam agreed with that last point by Millard but said the UK’s tax burden is still not particularly high by international standards and there is not much of a correlation across countries that a bigger state equals a worse performing economy. It is more important how well taxes are designed. Rhiannon Kinghall Were spoke of the importance of raising taxes in a ‘business-friendly way’.

Businesses’ view of tax

Asked how critical the level of taxation is to the competitiveness of the UK economy, Jon Richardson said tax ‘always gets factored in [to decisions to invest in the UK], but it is not the factor’. Until now, over the last few years, tax has probably been a neutral consideration, he said, but ‘With those [tax] increases next April, we will probably get to a point where the consideration tips into negative, rather than neutral.”

How important is tax to businesses in the UK? asked Dame Angela Eagle, Labour. Richardson said it is ‘a marginal call’.

Eagle questioned the emphasis on stability of taxes, commenting that we are at the beginning of a major structural change to our tax system. Demography is going to increase public expenditure, if we are going to have decent social care. We need a green shift. We have the aftermath of the pandemic and the move to online. Tax bases are being eaten away in certain places. We have challenges to our tax take that we did not have a few years ago: a massive increase in profit shifting and huge corporate tax avoidance.

Millard responded that the point is to get the tax framework in place. Kinghall Were said businesses recall fondly the 2010 corporate tax road map. Separately, Millard called for a clear framework for how the Government is going to collect taxes over the next 50 or 100 years, how the tax base is going to change, and how taxation is going to adapt.

Eagle asked about tackling profit shifting. Kinghall Were speculated that there are questions as to whether a 15 per cent global minimum rate of tax is the right rate, but it will provide some of the certainty that has pervaded this debate about the incremental changes over the last five or 10 years.

Kevin Hollinrake, Conservative, spoke of the need to cut taxes on business investment, to which Richardson said you either cut taxes or increase reliefs. He said: “Rather than this boom of a massive ‘super deduction’ and then going right back to where we were with capital allowances or tax depreciation for investment, which was internationally pretty far down the competition stakes, I would move to something in between the two and keep it there for a longer term.” This is partly because businesses investment is based on three-year to five-year plans.

Inflation

Harriett Baldwin (photographed below thanks to Parliament UK), Conservative, asked which taxes have the highest impact in terms of inflationary pressures, and which taxes the witnesses thought could change without having any impact on inflation. IFS’ Adam said VAT and excise duties feed into prices, as will the health and social care levy, or employers’ national insurance more generally. But he explained the macroeconomic side of it, which is that a fiscal loosening, whether that is tax cuts or increased spending, helps to stimulate and heat up the economy, and therefore tends to increase inflation, regardless of the kind of tax cut (‘although some more than others’).

PwC’s Richardson said businesses think all taxes are a cost and a burden and will be considered in the cost base. Macfarlanes’ Kinghall Were remarked that there are some other noninflationary tax changes that you might consider, in terms of administration and simplification. Millard from the NIESR cautioned that a particular move in tax can have a different effect in the short run versus the long run.  And, he added, temporary tax cuts and permanent tax cuts have very different effects. He also spoke about the distinction between labour taxes and capital taxes. “All tax cuts increase demand,” he said.

Laffer curve

Asked about the ‘Laffer curve’, Adam told Alison Thewliss, SNP, that tax cuts can sometimes pay for themselves. He speculated that the top rates of stamp duty on £1.5 million-plus properties are ‘probably pretty close’ to revenue-maximising already, as is the 45 per cent of income tax and tobacco duty. In other answers to Thewliss, he agreed there are absolutely other things that should be considered when measuring success of a tax, ‘it’s not just about revenue’. Asked about the impact of corporation tax going up from 19 per cent to 25 per cent, Adam said raising it now worries him much less than if it were already at 30 per cent and we were talking about raising it by six percentage points. He supports what the Chancellor said in his MAIS speech that the most effective thing you can do for investment is not necessarily just about the headline rate, it is also about the treatment of investment.

Richardson said: “The reality is that there is a shortlist – skilled labour and all those sorts of things are fundamental. Tax will not trump those; you have got to have them.” He noted that the UK has got R&D incentives as well, which, again, are relatively ‘ungenerous’ internationally. He agreed with Thewliss that, broadly, you need a tax regime that allows you to have an educated population, a health service, and all the other things that make things work. Kinghall Were said businesses are mostly interested in the effective tax rate.

Tax avoidance

Adam said he would treat avoidance and evasion “somewhat differently, but at least on the avoidance side, a lot of the problem is in not setting out clearly what it is that we are trying to tax. Having a clearer view of that makes it easier to reduce those opportunities. Tax evasion is a different matter, that is not a matter of the tax base; that is a matter of tax enforcement, essentially.”

Economic growth

Labour’s Rushanara Ali asked which taxes incentivise growth. Richardson said the tax regime to enhance investment is definitely an area to focus on because if we foster investment, that leads to growth. The UK could do more in the R&D regime and the capital allowances regime to encourage environmentally friendly investment, he said. Adam opined that, broadly, taxing the rich less will probably be a more effective way of incentivising activity than taxing the poor less. He then said for the long run, what matters is the supply side of the economy and the incentives the tax system creates for behaviour. That is about doing less to discourage work and less to discourage investment, for example, he said.

Ali asked if it is better to focus tax cuts aiming to promote economic growth on small business growth as opposed to bigger businesses? Kinghall Were’s view was that you cannot choose one over the other, while Richardson said tax simplification is key, with Adam suggesting ‘keeping things simple and have the same regime across the board’.

Witnesses in the second session: John O’Connell, Chief Executive at Taxpayers' Alliance (TPA), Suren Thiru, Chief Economist at British Chambers of Commerce (BCC), and Alfie Stirling, Director of Research and Chief Economist at New Economics Foundation (NEF).

Business rates

Suren Thiru told Mel Stride that small businesses in particular dislike taxes that you pay no matter how well your business is doing or how well the wider economy is doing. An example is the NICs increase, which businesses view as ‘a tax on jobs’, and not necessarily only in respect of recruiting and hiring people. John O'Connell said it would help small businesses if the Government took buildings and machinery completely out of business rates.

Asked by Stride for alternatives to business rates, John O'Connell said you could look instead at taxes on consumption or land value taxes. Thiru called for fundamental reform of business rates, for example, lowering the overall burden, making it a simpler, much more light-touch system with more frequent revaluations, removing plant and machinery from business rate valuations to incentivise investment and looking at some of the ‘myriad’ reliefs in the system and simplifying it, particularly at the lower end. Alfie Stirling suggested you keep the tax base but have two different rates, one for land and one for commercial property, and disposing of the whole business rates retention system. For example, you could levy the tax on commercial property on a very similar basis to council tax, he said.

Online sales tax

Say you take £1 billion or £2 billion off business rates and increase the online sales tax - would overall prices go up, or would it just blend itself away? asked Kevin Hollinrake, Conservative. O'Connell said an online sales tax of two per cent could increase costs for the average consumer by about £50 or so a year, in the TPA’s opinion. Similarly, the proposed tax on online deliveries would make things more expensive, he said. A big consumer shift is happening so why tax online sellers’ success?

In contrast. Thiru likes the online sales tax, saying it is a rebalancing in the tax system, which is needed because bricks-and-mortar firms are taxed currently more heavily than online firms. A sceptical Stirling said the online sales tax is a lot of effort to raise a ‘fairly marginal’ sum of money. He remarked that ‘in the end it may come down to taxing profits more effectively from different types of sectors and different companies’.

Hollinrake asked: “What if we just scrap business rates completely, stick 4p or 5p on VAT, and that would be job done?” TPA’s O'Connell said it was appealing because of simplification and would eliminate the need for an online sales tax, although he cautioned that VAT is a regressive tax.

Hollinrake said the digital services tax was added to prices by Amazon, to which O’Connell replied that the incidence of tax is higher prices and lower wages or lower returns to investors.

Conservative Anthony Browne floated a logistics warehouse tax as an alternative to business rates . O'Connell said he was wary of specifically designing taxes to go after one particular sector. He added that consumers’ preferences are changing, and we should be not using the tax system to fight that. Thiru said BCC members would worry that Browne’s new tax would just add another cost on top of all the other costs they are facing.

Individual v business tax

Would you rather see tax reductions focused on individuals or businesses? asked Julie Marson, Conservative. Stirling, from the New Economics Foundation, said, in terms of tax burden, it is about thinking through the different types of individuals who ‘sit behind those businesses’. He noted that we have a much higher tax burden on workers—those who take earnings from work as their main source of income—than on those who take earnings through dividends or capital gains. Because you can move income into capital gains, that leads to adverse distributional outcomes, with those who have large stocks of wealth and rely on them for their income having a lower tax burden than those whose income comes from a different source. Also, from a tax-efficiency point of view, that means you are treating different types of income in the economy very differently, which will lead to behavioural effects that may not be desirable.

VAT

Is VAT a handy hit to, say, cut taxes for individuals and businesses at the same time? asked Marson. It can be, said Stirling, noting that it will reach a broader base of people. Income tax and national insurance—the other big-ticket items alongside VAT—often will not reach the very poorest, or at least not to a high degree, he explained. Marson asked for SMEs’ perspective. Thiru, from the British Chambers of Commerce, said, in terms of VAT, the rate is not something that businesses necessarily talk about, rather they talk more about the complexity or the myriad different rates that are out there.

Tax and UK Investment

Would it be better for UK workers if the tax system incentivised businesses to stay in the UK or relocate here, even though another impact of that might be higher taxes on those workers and individuals? asked Marson. Stirling was not that sympathetic to the view that tax rates are hugely important for the mobility of companies, saying it is ‘comparatively marginal’ compared to other factors, such as the domestic workforce, the regulatory environment beyond taxes and law and order. O'Connell from the TaxPayers’ Alliance said the best thing that we can do for UK plc is a big simplification of taxes. Thiru said a BCC members’ poll found three quarters of members said that tax administration and tax compliance are ‘huge’ issues for businesses, particularly at the smaller end, where they do not have the support in place from HMRC.

Tax and Employment

Emma Hardy, Labour, asked which taxes are best to cut to increase labour participation. Stirling said it all comes down to the withdrawal rate of work-related benefits. We must bring the universal credit taper rate down further, he said, adding that if you move to a system where you might have a lower personal allowance of income tax, but a higher work allowance, which will target that tax cut where it is most needed. Thiru talked about maybe providing a tax credit for skills training to help businesses train their existing and new staff rapidly. That is where we would focus, as well as the bottom-line costs around national insurance, he said.

Hardy then asked about the apprenticeship levy. Thiru observed that businesses have found it quite a challenge and quite complex, and that it does not necessarily have the flexibility that they need to help their own business needs.

Childcare and tax incentives

Hardy asked Stirling whether initiatives such as tax-free childcare are better at increasing participation in work than changes to the direct taxation system? Stirling opined that, in general, tax cuts are not very well targeted for almost any social outcome that you seek. If you want to invest in childcare, it is probably more efficient to do so through the supply side, thinking about how a childcare provider is funded, and about direct grants as opposed to through the tax system. BCC’s Thiru said the answers is simplifying childcare funding: “For example, each family would have a childcare budget that they can again use for their own needs to have this flexibility that meets their individual family work practices.”

Tax and the Environment

Conservative Gareth Davies asked what is better as a tool to tackle negative externalities, such as such as pollution: taxes or regulation? Thiru said tax because BCC members say that one of the big barriers, particularly around the transition to ‘net zero’, are upfront costs, and one of the things they often say will be helpful is allowances, support and grant support.

O'Connell remarked that taxes on externalities can actually create their own externalities. “A good example is the landfill levy. On the positive side, it disincentivises people from using landfill and encourages people to use recycling plants and all that kind of thing. On the downside, it encourages fly-tipping and makes that more attractive, as well as unofficial incineration and things like that.”

Stirling said the current tax regime in tackling negative externalities for the environment is ‘inadequate’ because we are not taxing negative externalities or regulating against them to a sufficient degree to remain within carbon budgets. He went on to say that if you want to incentivise something, it is much more efficient to do it through grants or targeted spending in some form, rather than through the tax system.  

Tax and Inequality

Siobhain McDonagh, Labour, asked which tax changes would be most effective in reducing income or wealth inequality? In a long answer, Alfie Stirling spoke favourably of the German system of income tax, a really interesting feature of which, he says, is the formula-based tax schedule, which means that there is no tax band – one tax rate that you move between, whether it is 20 per cent, 40 per cent or so on. Rather, your tax rate changes as your income goes up, so your tax rate changes as a function of your income. That allows you to have a lot more precision across the income distribution, he said. You can have a wide tax base, so everyone contributes something, but you can have very low rates at the bottom, rather than jumping from zero to 20 per cent, as in the UK system.

In separate comments on wealth taxes, O'Connell claimed wealth taxes do not work because ‘wealth is just inherently more mobile’ and ‘there are probably quite a lot of people who are asset rich and cash poor’. He went on to claim that it is usually taxes that stop low and middle incomes progressing to a better standard of life, most fundamentally income tax and national insurance. NEF’s Stirling said there are other ways you can get at taxing wealth. The most effective is to tax income from wealth, whether that is capital gains or dividends, or ones we do not often think about, such as stamp duty reserve tax, which is a tax on the owners of shares.

NICs

Mel Stride asked if any witnesses wanted to suggest an alternative to the NICs rise? NEF’s Stirling said you could raise £12 billion from just closing the gap in terms of the tax burden on earnings from work versus income from wealth. Or you could get rid of allowances in capital gains tax. You even could reform inheritance tax to be a gift tax, or equalise dividend income tax with income tax on earnings, he said.

The transcripts are here.

By Hamant Verma, CIOT Senior External Relations Officer