Examination of Witness (Questions 527
- 539)
THURSDAY 14 DECEMBER 2000
MR EDWARD
TROUP
Chairman
527. Thank you very much for coming to see us
again.
(Mr Troup) Not at all.
528. Could I begin perhaps with a very general
question relating to some of the things that you have written.
Can you at a general level tell us, first of all, why you think
that the Treasury does not live up to the standards that it should
do in terms of making tax policy?
(Mr Troup) Do you mean in what ways or what the reasons
are for not living up to the standards?
529. Could you have a stab at both.
(Mr Troup) Tax policy is very difficult because tax
is a difficult subject. It is unlike other aspects of Government
decision making which, in many respects, involve holding the ring
between competing interests and making a decision between those
two interests. It is about taking money from the citizen and it
is very much Government against the citizen rather than Government
holding the ring between two competing groups of citizens. I would
not say it is more important to get it right but it is more difficult
to get it right in tax than in other areas and it is that much
more important that the Civil Service provides the weight, the
counterweight, to the views of the democratically elected ministers
than perhaps it is in other areas. So there is a need for the
Civil Service to provide a strong centre of excellence to assist
the decision making, to make sure that the decisions made do properly
take into account all the competing interests. In what ways are
the Treasury failing to do this? The interested parties in this,
apart from obviously the taxpayers who are out there and who largely
do not have a say until the decisions have been made, are, of
course, the Inland Revenue and Customs and Excise, the tax raising
departments. Because they are the experts in the topic, because
they are the people who actually have to go out and collect the
tax, and because tax collection is actually, in a sense, the priority
of taxation, there is a danger they have too much of a say in
the policy making. So the principal failing which I see is the
lack of a coherent centre within which all the competing interests
in making a good tax policy can be brought together, that the
Inland Revenue and Customs and Excise tend to have too much of
a view in some respects, their views carry too much weight, simply
because they are concerned necessarily about loss of tax. Ministers
clearly have a strong view but they come from a relatively uninformed
position in terms of the details of the tax system and they need
good quality advice to make sure that the decisions are good decisions
which will have the effect they want and will not disturb unduly
the flow of tax and will be robust over a period of time. I think
in all of those respects the Treasury has failed. I, as you know,
spent two years at the Treasury from 1995-97 and what really surprised
me, and I have to say appalled me, getting there was the lack
of knowledge of tax within the Treasury itself. That is not to
say that the Treasury is not staffed by extremely good people
because they are some of the best civil servants there are and
some of the cleverest, but they are civil servants who have a
training which is in a variety of different aspects of Treasury
work, they tend to get moved from post to post every two years
or so, so while they may be very clever, to come to, for instance,
responsibility for indirect taxes having spent, I do not know,
two years on monetary policy and two years on health spending
does not actually leave you in a very strong position to deal
with Customs and Excise or the Inland Revenue, whichever taxes
you are looking at, and to work to give coherent advice to the
ministers concerned. I think that is the central failing of the
Treasury. Why that has arisen in a sense is not so important,
what is important is to say what is the failing and the failing
is the lack of a good, coherent tax policy unit staffed by a representative
group of experts, principally internal experts, that is to say
principally economists expert in tax, representatives of the revenue
authorities, but also involving people from outside.
530. You are talking about tax policy rather
than tax management?
(Mr Troup) I am talking about tax policy. Tax management,
it seems to me, is not a matter for the Treasury in terms of tax
collection, which is what I assume you mean by tax management.
That is a matter for the revenue departments.
531. But policy, surely, is the job of politicians,
is it not?
(Mr Troup) The decision on policy is the job of politicians.
The job of the Civil Service is to ensure that the decision making
is informed. In other words, when the minister makes a decision
he has the absolute right to make whatever decision he sees fit,
he has a democratic mandate to do so, but if he makes a decision
he makes it in the light of the best information and, if necessary,
if he needs to say "there are these objections, these are
the reasons why I am overriding them" he can do so.
532. So your tax code is related to that point,
is related to providing ministers with proper information in the
form that they can use to make their decisions in the best way?
(Mr Troup) Correct.
533. That is what the tax code basically delivers.
(Mr Troup) There are some words that the Chancellor
used in his paper, Fiscal Stability, which obviously was
concerned about overall fiscal policy rather than the policy for
the tax system specifically, and what he said was that the code
of fiscal stability "sets out the basis for fiscal policy
which will support the long-term economic stability on which prosperity
depends and that it will ensure that fiscal policy making meets
the standards of transparency and accountability that the public
have a right to expect". It seems to me that is absolutely
right and what this Government has done on fiscal policy is absolutely
excellent in that respect. I do think that when we come to tax
policy we do not have the same standards of transparency and accountability
which, as the Chancellor said, the public have a right to expect,
in part due to the lack of support from the Treasury.
Mrs Blackman
534. Can I just go back a step and clarify for
my own purposes what you were saying about the division of labour,
if you like, between the politicians and the Treasury civil servants.
Politicians define the effects of the tax, they say what effects
the tax will have, but a more coherent unit of civil servants
within the Treasury for them to translate what the politicians
are saying into a workable, efficient system, is that what you
are saying?
(Mr Troup) That is exactly what I am saying. If ministers
want to do something about climate change, to do something about
competitiveness, and they want to do something through the tax
system it seems to me that the function of the Treasury is either
to propose some measures to deliver that broad policy objective,
or to the extent that the ministers come forward with some specific
policy ideas—Climate Change Levy—to actually ensure
that is properly evaluated and that there is a greater degree
of public explanation as to why that approach has been taken.
If the minister wants to introduce a measure, as it were, in the
face of a disagreement or contrary views from his officials against
this set of policy, the code of good tax policy which we have,
of course he can do so but there would be a greater degree of
public accountability because he would have to explain why against
these criteria he is doing something which appears not to comply
with them. With luck what would happen is that the measures that
were brought forward would accord with the code. They would need
to be coherent with the rest of the tax system and would ensure
better policy making overall.
Mr Beard
535. I am trying to grasp the concept of the
phrase "tax policy", it is not fiscal policy, it is
not monetary policy and not something of somebody else. Is your
concept of tax policy essentially deciding, given a certain amount
of money is to be raised, where and how it should be raised? Is
that the concept of tax policy?
(Mr Troup) I think that is the best way of looking
at it, yes. Tax policy is deciding how the money which the Government
wishes to raise will be raised and, within that, achieving what
the Government has set out it wants to achieve. The early statement
the Government made in the July 1997 Budget was that the tax system
should be well designed to meet the objectives of the Government
of the day without generating undesirable side effects. It seems
to me that is the next thing that tax policy should think about
after raising the amount of money which you want to raise but
also, again the Government statement of previous governments,
is that there are economic and social aims to be achieved through
the tax system and that is part of tax policy. What we have seen
is too many measures which have good economic or social intentions
behind them but are either defective in their specific design
or just inconsistent with another part of the tax system simply
because there is not a clear framework for the tax system overall
which ensures that one measure is not brought in which is inconsistent
with another measure or at least fails to explain why those measures
are inconsistent. That is what I mean by tax policy, starting
with tax raising, looking at fairness and efficiency, but also
taking account of ministerial wishes.
Chairman
536. Can you give us examples of fixed rules
comparable with fiscal rules?
(Mr Troup) You cannot generate fixed rules. I think
what you can do is you can acknowledge the very significant trade
offs that have to be made in any tax policy making and to require
decision making to take account of those trade offs and to seek
to explain how the trade offs have been made. Now, a simple trade
off, and I have talked to this Committee before about it, is between
simplicity and fairness. A simple system simply raises income
tax from everybody at certain prescribed rates, but if you do
not have a system which taxes benefits in kind—company cars
or whatever—it will become an unfair system because everybody
will give their employees company cars instead of giving them
cash and as soon as you do that it becomes more complex. Now the
trade off between fairness and simplicity is not an easy one.
Too often you will find ministers in governments—and this
is certainly not specifically about this government, the last
government was just as bad about this—putting forward in
one Budget something which is designed to make things simpler
and fairer and often in the same Budget putting forward something
in the name of fairness without any acknowledgement that these
could be conflicting aims. It seems to me what your code can do
is to require the decisions to be supported by Treasury produced
papers analysing the relative weights of fairness, certainty and
simplicity, and to explain how the trade offs in these particular
cases have been met. That is one example, in fact I think it is
probably the most important example I would start off a code with
to make explicit trade offs.
537. Do you think that the Treasury is getting
better or worse at tax making and, by having its hands freed by
transferring monetary policy to the Bank of England, has it been
left to make a better fist of tax policy?
(Mr Troup) I think there is an interesting point in
that. I think the reason that the Treasury has not been good with
tax policy is precisely because until the beginning of this Government
it was over-concerned with monetary policy and regarded its principal
role as being guardians of monetary policy and rather left the
details of tax policy to the revenue departments. What has happened
since monetary policy was taken away from it and given to the
Bank of England is that void, or that weakness, I think has been
exposed. Certainly while I was at the Treasury there were people,
senior people, who recognised that there was a weakness of tax
policy, that there was not at that time really a political will
to do anything about it. I do think that since monetary policy
has been taken away quite a lot of effort has been made by the
Treasury, and of course I have not been within the Treasury but
I have had to deal with it a great deal from the outside, to remedy
that weakness. I think things are getting better. At the same
time that the Treasury has been seen to improve we have clearly
had an activist Government and Treasury ministers who have tried
to do a great deal with the tax system. Whether they have managed
to improve as fast, as it were, as the increase in activity from
Treasury ministers I doubt, I think there is a lack of counterweight
to ministerial decisions.
Mr Davey
538. Can I come on to how the code might work
for making the tax system more simple, which is one of the main
criticisms. You have made a number of criticisms about this Government's
record so far but mainly about previous governments, that they
tend to make tax far more complicated for taxpayers. Do you think
this is a lack of political will, to simplify the tax system?
(Mr Troup) I think that the lack of any opposition
to measures which make the tax system more complex has resulted
in it becoming more complex. As I said at the beginning, the odd
thing about tax is you do not have competing interests. If the
Government stands up and says "we are going to give a tax
break to the film industry", clearly the film industry are
going to be delighted and everybody else, although they have,
as it were, a small countering interest because they have not
had a tax break and they are going to have to live with the complexity,
are unlikely to say anything. This is not the same as if the Government
goes round writing cheques to someone here and not someone there,
I do not think. There is no external—external from the Treasury—incentive
to make things simple apart from people like myself and others
who sit here and say the tax system is very complex.
539. Should it not be people on this side of
the table saying that?
(Mr Troup) I think you should but, again, it is difficult
for you to say that. It does seem to me to actually do anything
about it, simply because of the way the Budget process works,
and I am not an advocate of abolishing Budget secrecy, I think
you have to have a high degree of secrecy in Budgets in order
to get any tax reform or tax change through, which means when
you come to the decision to introduce the tax relief for the film
industry you want to have a proper debate behind the closed doors
of the Treasury at which the complexifying elements are weighed
against the benefits. I feel what has happened is that because
there has been no counterweight, because there has been no standard
or requirement to set measures against issues of complexity, your
Committee has come and asked after the event but there has been
no code which effectively requires ministers to say "I have
introduced this measure, I have considered the complexity, I have
considered incentives, I have considered simplicity and this is
the conclusion I have come to". The Chancellor can just stand
up and say "I am introducing this relief for the British
film industry" but it is easier for governments to do that,
and it seems to me the code would help. I am not suggesting this
is going to cure the complexity problem forever, once and for
all, but it is I think going to help. It will produce some check
on the really quite considerable freedom ministers have at the
moment to make the system complex without any resistance.
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