Is anyone brave enough to put tax reform above party politics?

The UK tax system is a mess and in need of reform. This is perhaps the most uncontroversial sentence I have written since I began writing in these pages. The politics of tax has made even sensible reform nigh on impossible — reform that almost all sides of the political spectrum agree would boost economic growth.
There is little doubt that tax complexity, as well as the perverse incentives and distortions of outdated or layered tax structures, is an impediment to UK productivity. In significant pockets of the economy, securing a better accountant is a more valuable endeavour than developing a better product. Yet short- term political considerations are proving formidable barriers to reform. Tax has become such an emotive issue — with the UK tax burden now approaching a 75-year high — that each general election, the main parties set about trying to set tax traps for each other. This sucks the oxygen from sensible debate.
By way of an example, before July’s general election both big parties ruled out increasing any of the main UK taxes, namely income tax, VAT or national insurance. Yet this pledge not to touch the taxes that raise almost two thirds of all tax revenue merely triggered heightened speculation that other parts of the tax system — including capital gains tax, inheritance tax, council tax, and taxes on the value of assets — will see big increases.
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This approach has resulted in a chilling effect on economic activity in the run-up to the budget on October 30. This is not only visible in recent data on consumer and business confidence, which have both fallen back. Retail banks are now reporting a seizure in activity among UK small and medium-sized firms. Investment advisers have reported more than a billion pounds’ worth of share sales by company directors since the election amid fears of a big rise in capital gains tax. The Alternative Investment Market (Aim) that provides growth capital for UK companies is trading like its days are numbered.
To give the Labour government credit, they haven’t directly fuelled any of the specific rumours on tax. These speculative stories have emerged by a process of elimination, allied to some of the politically motivated framing of the economic inheritance. This parliament — absent a big external shock to the economy — looks set to involve a political muddling through on tax. But if the Labour Party aspires to a second term — or indeed any other political party is looking to govern coherently from 2029 — they should aspire for a better way of approaching tax next time out. That requires work right now. Work that should involve a royal commission on tax reform.
The good news is that so much of this work on tax design has already been done. The Mirrlees review of 2010 stands the test of time. The original panel of reviewers included the late eponymous chairman, Sir James Mirrlees, as well as my fellow Times columnist Paul Johnson. They have prepared much of ground on replacing fuel duty as transport systems electrify, on amalgamating income tax and national insurance into a single payroll tax, on abolishing distortionary property taxes such as stamp duty and replacing them with a land value tax.
What is missing is putting this body of expert work on a statutory footing, as well as updating it with the challenges that have emerged over the past 14 years. We have seen with the Dilnot commission on social care funding what happens when expertise faces off against political calculation. The latter holds the whip hand on almost all occasions.
The advantage of a royal commission is that it elevates smart, evidence-based policy design above the cut and thrust of daily politics. As such, it is important that such a commission isn’t asked to opine on whether taxes are too high or too low. This would drag any commissioners and their recommendations into the political and ideological mud. That judgment should remain a party-political campaigning point. Too often this ferociously debated hinterland on whether the UK should have a larger or smaller state sector blocks any move towards reform.
Other areas that any royal commission should investigate include a broadening in the base for levying VAT, a levelling of the tax playing field between the physical and online business world, and establishing a price for carbon that balances the net zero agenda with the fact that carbon pricing does not exist in an international vacuum. Too much of the debate on tax fails to realise that people and capital are increasingly mobile and can choose their tax jurisdiction. A tax system fit for the future will surely realise that this is a trend that is only going to accelerate.
Current government thinking has recognised that long-term clarity on tax is important. The chancellor has pledged a road map for business taxation in her upcoming budget, fulfilling a pre-election pledge to do this within the first six months in office. But to avoid such a road map getting bogged down in political jousting, there needs to be some effort at securing bipartisan agreement. Not least because the unifying feature of the four remaining Conservative leadership candidates is a desire for government to “do less”.
While I am full of scepticism on the underlying detail of such pledges, you can see another tax eco-car crash coming at the next general election if tax reform isn’t raised above the political fray. The prize for getting this right is a pick-up in economic growth. Now that truly is a bipartisan goal.
Simon French is chief economist and head of research at Panmure Liberum