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Significant reforms of land and property taxes, inheritance tax and capital gains taxes should be an explicit aim of any government which wishes to promote simplicity and economic efficiency. A new briefing from the Institute of Economic Affairs calls for the abolition of several taxes – including Capital Gains Tax, Stamp Duty, Council Tax and Business Rates and Inheritance Tax – whilst also outlining several pragmatic alternatives.
Abolish Capital Gains Tax (CGT)
- When applied to investments in company shares, capital gains tax is generally a double tax because it taxes anticipated profits and retained profits that are taxed elsewhere in the system. Where investments are designed to hide income as capital gains, income tax should be charged on investment returns as already happens in some cases.
- Capital gains tax raises relatively little revenue and, as it is a tax on transactions it is highly distortive. Higher rates of CGT discourage investment, deter entrepreneurship and encourage avoidance.
- If CGT is not abolished, price indexation allowance should be re-introduced so that investors are not taxed on illusory gains.
Overhaul Inheritance Tax
- The UK is an outlier in charging a tax on estates at death and at such a high rate. Taxpayers go to great lengths to avoid paying it. Taxes on estates are a form of double taxation (on income accumulated as savings and passed on at death) and favour consumption over investment.
- One option would be to follow the example of a number of developed countries and abolish the tax altogether.
- Alternatively, it could be reasoned that people who inherit money or are given large gifts should be taxed on the income they receive from gifts and estates in a similar way to how they are taxed on other forms of income.
- If Inheritance Tax is not abolished, the government should move to a system that taxes large gifts at a rate closer to 20 per cent over a large lifetime tax-free limit of around £500,000. This would reduce the burden on estates that are widely disbursed and, with a lower rate of tax, reduce the incentives for avoidance.
Abolish Stamp Duty, Council Tax and Business Rates
- Land and property taxes in the UK are high but extraordinarily inefficient. In particular, stamp duty, as a tax on transactions, reduces labour mobility and also makes it more expensive for people to downsize or move home for other reasons. Council tax is regressive in many respects and business rates act as a disincentive to investment in business property.
- There are now approximately ten different sets of rules of stamp duty depending on the value of the property. Just 20 years ago, there were two rates, with one being zero.
- The government should abolish stamp duty, council tax and business rates and replace them with property taxes that are much less economically harmful. Such changes could easily be phased in over five or ten years.
- Council tax and stamp duty could be replaced with an annual property-based tax set at a fixed percentage of a property’s value, with a cap of 1%.
- The cost of this would be mainly borne by the rich, those who move less often and those currently able to avoid stamp duty. It would also include substantial charges levied on foreign non-residents who own UK property.
Commenting on the briefing, Professor Philip Booth, Academic Fellow at the Institute of Economic Affairs, said:
“Changes to these three groups of taxes would considerably simplify the tax system and make taxes more economically efficient. The changes would be largely self-contained. The proposals would represent a radical reform of, and a huge improvement to the UK tax system.”
Notes to Editors:
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To read the full briefing, click here.
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