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
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
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
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,
- 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
- 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.
The second contained a number of tax practitioners.
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,
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.
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
The tax system should be:
4. Easy to collect and to calculate
5. Properly targeted
7. Subject to proper consultation
8. Regularly reviewed
9. Fair and reasonable
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.
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.
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
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.
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.
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.
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.
However, as the CBI notes, "the OECD acknowledges that it
is politically difficult for governments to shift the tax base
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."
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."
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
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
Anita Monteith declared that she is a member of the Office of
Tax Simplification SME Committee. Back
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
See http://www.doingbusiness.org/reports/special-reports/paying-taxes-2011 Back
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
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
Ninth Report of Session 2008-09, Too important to fail, too
important to ignore, HC 261-I, para 12 Back
Tax Policy Reform and Economic Growth, p 10 Back
Ev w107 Back
Ev w89 Back
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