Principles of tax policy - Treasury Contents


1  Introduction


1. In June 2010, the Government published Tax policy making: a new approach. In the introduction the Exchequer Secretary wrote:

I want a new approach to tax policy making; a more considered approach. Consultation on policy design and scrutiny of draft legislative proposals should be the cornerstones of this approach. The Government will always need to maintain flexibility to make changes to the tax system. But in doing so, it should be transparent about its objectives and open to scrutiny on its proposals.

The Government set out a new approach to tax policy:

the Government is committed to a new approach to tax policy making, designed to support its ambition for a more predictable, stable and simple tax system:

  •   to increase predictability, the Government will provide taxpayers with clarity on its approach and certainty on the future direction of the tax system;
  •   to increase stability, the Government will slow down the rate of change to the tax code, focusing on fewer and better developed proposals supported by improved processes for changing tax law; and
  •   to increase simplicity, the Government has confirmed its intention to create an independent Office of Tax Simplification.

1.6 It is also important that the Government is held to account in the development of tax policy:

  •   when the Government makes changes to the tax code, it will ensure there is sufficient opportunity for policy and legislation to be properly scrutinised;
  •   to support good scrutiny, the Government will be more transparent about the rationale and impact of tax policy changes; and
  •   to maintain integrity of the tax code, the Government will evaluate the impact of significant changes after implementation.

The rest of the document set out changes to improve the tax policy making process and, in particular, the preparation of new proposals.

2. The Government's policy changes are welcome, but while they give significantly more clarity about the way in which tax policy and legislation will be dealt with in future, they could do more to set out the principles underlying that policy. To this end, we announced an inquiry to investigate these principles, asking:

  •   What are the key principles which should underlie tax policy?
  •   How can tax policy best support growth?
  •   To what extent should the tax system be structured to support other specific policy goals?
  •   How much account should be taken of the ease and efficiency with which a particular tax can be imposed and collected?
  •   Are there aspects of the current tax system which are particularly distorting?

3. Our work is based on extensive written evidence, which is remarkable for the degree of common ground on basic principles. It is also based on two sessions of oral evidence. The first was drawn from the authors of the Mirrlees Review of Tax Policy, conducted by the Institute for Fiscal Studies.[1] The second contained a number of tax practitioners.[2] We are grateful to all those who gave evidence, both oral and written. We are also extremely grateful to the ICAEW, and especially grateful to Anita Monteith,[3] Tax Manager of the ICAEW Tax Faculty, who acted as Specialist Adviser on this inquiry and worked extremely closely with Committee staff in preparing this Report.

4. This is a preliminary report. It is the first time the Treasury Committee has examined the overall structure of the tax system. Not everybody will agree with the approach we have taken. In particular, some will want to add further principles, but in this Report we have endeavoured to create some common ground with the intention of stimulating greater stability in policy making, leading to incremental reform over a number of Budgets. We will also require the Treasury to explain the rationale for its approach to taxation in more detail and, among other things, to assess its coherence against increasingly accepted principles.

5. There is nothing new in seeking an overarching principle or principles for tax policy. For over two hundred years there have been attempts to define a set of fundamental principles, providing rules by which to assess objectively and apolitically, new tax policy proposals.[4]

6. In 1999 the ICAEW produced ten tenets for a better tax system. These tenets have been extremely influential. However, they look at the tax system as a whole, rather than focussing, as we do, on tax policy. (Our sub-committee is currently inquiring into the administration of HMRC). In summary, the ICAEW's tenets are:

The tax system should be:

1. Statutory

2. Certain

3. Simple

4. Easy to collect and to calculate

5. Properly targeted

6. Constant

7. Subject to proper consultation

8. Regularly reviewed

9. Fair and reasonable

10. Competitive

7. There is a wealth of information on tax matters. The OECD has regularly reviewed tax policy, both as a whole and through studies of individual issues. For the last six years the World Bank and PwC have produced an annual report on the ease with which tax can be paid in different countries around the world.[5] In 2010, the Organisation for Economic Cooperation and Development (OECD) in Paris and the Institute for Fiscal Studies in London each published important reports on the fundamentals of tax policy.[6]

8. If determining tax policy were easy, this inquiry would not be necessary. Tax reform needs political backing. Our aim, as a cross party committee, has been to produce a number of tax policy principles which are common ground across the House. We will consider the measures contained in future budgets against these principles.

Pace of change

9. The tax system is the product of history, as Christopher Wales, a consultant and former member of the Council of Economic Advisers of HM Treasury, told us:

The UK tax system, as it stands today, reflects the economic, social and legal history of our country. If legislators were to start afresh, it would be constructed somewhat differently. Society changes and the economy changes.

and:

Largely because of its origins and history, the tax system today is riddled with instances where principles are in conflict. Anyone seeking to derive the principles that underpin the system today from the legislation would struggle to establish any principle from what we have on the statute book that is not contradicted somewhere in another piece of legislation.[7]

Over the long term, there may be a case for substantial changes to the tax system. As society and the economy change, the tax system should change to reflect them.

10. Several radical changes have been mooted. In its work on the financial crisis, the Committee in the last Parliament noted Lord Turner's point that the different tax treatment of debt and equity was among the factors which led to financial instability. However, Lord Turner was not sure that the United Kingdom could make a radical break to such an entrenched system.[8]

11. In this inquiry, we received many submissions advocating radical change to the tax system, such as the imposition of a land value tax. The supporters of such a tax consider that it would tax economic rent rather than economic activity and would meet the OECD criterion that recurrent taxes on immovable property were the least harmful tax.[9] However, as the CBI notes, "the OECD acknowledges that it is politically difficult for governments to shift the tax base onto property."[10] The ICAEW warned "Our initial conclusion is that, even if such a move was desirable economically and let alone whether it would be politically acceptable, it would involve a major rebalancing of the UK tax system which would take time to achieve and risks introducing considerable distortions and behavioural changes."[11]

12. Not only are there political difficulties: practical matters, such as the way in which such values would be assessed and the extent to which such a tax should take account of the current or the potential use of land, would also need careful consideration. We also note concerns that "While such a tax system would avoid distortions in economic behaviour, it would be highly unlikely to yield sufficient revenues to fund socially useful expenditure without producing substantial inequity."[12]

13. While we attempt to construct some principles to guide policy makers, we recognise that sudden wholesale reform is likely, in some areas of the tax system, to be impracticable. The principles we and others set out can shape the system over the long term. We welcome the fact that tax policy making is currently the subject of considerable analysis and scrutiny, particularly by practitioners. If this can be sustained, there is a reasonable prospect of gradual improvement to the tax system.


1   Professor Richard Blundell, of the Institute for Fiscal Studies (IFS), and University College London, Professor Stephen Bond, Oxford University, Stuart Adam of the IFS and Paul Johnson, of the IFS and Frontier Economics Back

2   Francesca Lagerberg, of Grant Thornton, John Preston, of PricewaterhouseCoopers, Andrew Hubbard, of RSM Tenon and Past President, Chartered Institute of Taxation, and John Dickie, Director of Strategy and Policy, London First Back

3   Anita Monteith declared that she is a member of the Office of Tax Simplification SME Committee. Back

4   The most pragmatic may be that of Jean-Baptiste Colbert, the Controller-General of Finances of France under Louis XIV:

The art of taxation consists in so plucking the goose so as to obtain the largest amount of feathers with the least possible amount of hissing.

The most frequently quoted by our witnesses was that of Adam Smith:

The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.

The tax which each individual is bound to pay ought to be certain and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor and to every other person.

Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the contributor to pay it.

Every tax ought to be contrived as both to take out and to keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the state.

Smith's principles have been the subject of debate ever since; Malthus added the long term stability of the economy. Back

5   See http://www.doingbusiness.org/reports/special-reports/paying-taxes-2011 Back

6   OECD(2010) Tax Policy Reform and Economic Growth, OECD Publishing, http://dx.doi.org/10.1787/9789264091085-en The Mirrlees Review, Tax by Design, see www.ifs.org.uk/mirrleesReview Back

7   Ev w133 [note: references to 'Ev wXX' are references to written evidence published in the volume of additional written evidence published on the Committee's website] Back

8   Ninth Report of Session 2008-09, Too important to fail, too important to ignore, HC 261-I, para 12 Back

9   Tax Policy Reform and Economic Growth, p 10 Back

10   Ev w107 Back

11   Ev w89 Back

12   OECD 2001, Tax Policy Studies No. 6, Tax and the Economy: A Comparative Assessment of OECD Countries, p 17, see also OECD (2010), Tax Policy Reform and Economic Growth, pp 51-2, 92-94 Back


 
previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2011
Prepared 15 March 2011