The tax system needs replacing. This was the key finding in a report by the Institute for Public Policy Research (IPPR).
The report from the IPPR, a leading progressive think tank, looked into how the current UK tax system appeared to be failing some of the lowest earners, particularly with the arbitrary way that tax rates varied, benefitting some and not others.
The IPPR highlighted the inefficiency, incoherence and lack of progressiveness inherent in the present system and went on to recommend a streamlined apparatus that would:
- Combines rates and allowances for National Insurance Contributions (NICs) and income tax from employment into one schedule
- Apply the schedule on an annual basis to all income, irrespective of their source
- Use a formula-based system, as opposed to the current marginal tax bands.
The replacement tax would base an individual’s marginal and average tax rates on their precise income.
The report also demonstrated the lack of progressiveness in the current UK system by highlighting some of its inequality. For instance, the effective rate on earnings from employment once the tax-free allowance had been taken into account was 32 per cent, whereas for income derived from company dividends, it was 7.5 per cent.
The IPPR said: “For income tax payers on the lowest earnings, effective marginal tax rates can be as high as 75 per cent as means-tested benefits are withdrawn as a result of higher pay.
“This variable treatment of different sources of incomes, combined with sharp ‘cliffs’ in the marginal rate between tax bands, creates perverse economic incentives, makes tax avoidance more likely and is far from transparent.
“Overall, the UK’s tax system is not progressive. On average, the poorest 20 per cent of households pay 35 per cent of their gross income in tax, far more than the average for all other households.”
The need for change was a sentiment echoed by the Tory peer, David Willets. The chair of the Resolution Foundation used a speech in London to spell out the desire for radical reform in the British tax system. He said there was a need to reduce the burden being placed upon young people who have seen their living standards slip compared to that of older generations.
The former Minister of State for Universities and Science proposed reforms to both Council Tax and Inheritance Tax (IHT) and for the ‘baby boomer’ generation, who had benefited from the welfare state and the rise in house prices, to contribute more to ensure the soaring cost of public services wasn’t left for the younger generation to fund through tax hikes.
Lord Willetts pointed towards property as being one source of additional tax revenue, saying that although “these taxes are unpopular […] the alternatives are far worse”.
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