Abolish the budget in its current format
The Institute of Economic Affairs’ today calls on politicians to pursue policies that meet declared government aims: to reduce the budget deficit, encourage a more coherent tax system, and to improve the framework of government for long-term fiscal responsibility. Priorities for tax cuts and simplification should be those that build positive incentives and attract investment to the UK.
The paper recommends the abolition of the current all-encompassing Budget and recommends that it is replaced with a short statement outlining the changes to tax rates, allowances and borrowing required to meet public spending obligations. Other areas outlined in this Budget for reform include the abolition of inheritance tax and child benefit, as well as a significant increase to the 40p income tax threshold.
Key IEA proposals for the Budget include:
• Correct and reverse fiscal drag. The government should impose a ‘double-lock’ on the uprating of thresholds over the next parliament (raising thresholds by the rate of increase in prices or wages, whichever is higher). Thereafter, thresholds for all taxes (not just income taxes) should be automatically updated in line with wage growth.
• Rule out a ‘mansion tax’ and reform stamp duty. The government should not introduce a so-called ‘mansion tax’. Furthermore, marginal rates of stamp duty land tax should be significantly reduced over a five-year period. Eventual abolition is desirable.
• Reform council tax. The government should either replace council tax with a tax on imputed rent for homes worth more than £1 million, or introduce a tax on imputed rent on all but primary residences and for all foreign-owned residences.
• Abolish Inheritance tax in its current form. A lower rate of tax of 20 per cent should be introduced on lifetime gifts received over £500,000, with generous allowance for small gifts received by low earners in individual years.
• Abolish the 45p tax rate and increase the 40p threshold significantly.
• Child benefit should be abolished. It should be replaced with a system of fully transferable household tax allowances. This system could be integrated with means-tested payments for lower-income households.
• Preserve higher rate tax relief for pensions. The government should commit to maintaining the current system of income tax relief for pension contributions, rather than creating a so-called ‘equalised’ rate of tax relief. In addition, the tax-free lump sum available from pension funds should be abolished.
• Abolish the Budget in its current form. The current all-encompassing Budget should be abolished and replaced with a short statement outlining the changes to tax rates, allowances and borrowing required to meet public spending obligations. Other announcements should fall under the auspices of the relevant departments.
Commenting on the report, Mark Littlewood, Director General at the Institute of Economic Affairs, said:
“This paper outlines a coherent agenda for tax simplification and fiscal responsibility. Our vast and complex tax system creates perverse incentivises, creating uncertainty for households and businesses across the UK.
“For too long, the annual Budget has placed emphasis on politics at the expense of sound economics. Rather than politicians chasing votes with goodies for different interest groups, we should ensure that the transparency of tax and spending decisions remain the Budget’s dominant purpose.”
Notes to the editor:
To arrange an interview (live or pre-recorded) with an IEA spokesperson, please contact Stephanie Lis, Head of Communications at [email protected] or call on 07766 221 268.
The full IEA Budget Submission, by Philip Booth and Ryan Bourne, can be downloaded here.
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