Written evidence submitted by HM Treasury
What are the key principles that should underlie
tax policy?
1. Defining a sound basis for tax policy making
is critical—taxation affects the decision making processes
of business, households and individuals, reaching into all aspects
of life and the economy. In 2009-10, Net Taxes and Social Security
Contributions were equivalent to 34% of GDP.
2. There is not a fixed set of principles underlying
tax policy, but there is a broad consensus which has been discussed
since at least the days of Adam Smith[53].
— Sustainability:
the tax system should be sustainable to long-term trends.
3. The core aim of a tax system is to raise revenue
for the Government to spend on its priorities. However, the underlying
structure of the tax base is subject to constant change. Demographic,
economic, social and environmental trends all impact on the sustainability
of the base. The Government is committed to reinforcing the sustainability
of the fiscal position, and as part of this Budget Responsibility
and National Audit Bill sets out the main duty of the Office of
Budget Responsibility (OBR) to examine and report on the sustainability
of the public finances.
4. Tax policy should also be flexible enough
to respond to a changing economic environment. Part of this response
is determined by automatic stabilisers which can help provide
a boost to the economy when growth slows, but also moderate economic
expansion when growth is above its trend level.
— Efficiency:
the tax system should place the minimum economic cost on society
and markets while helping provide the right incentives growth.
5. The tax system should aim to be as non-distortionary
as possible. In order to maximise efficiency, the ideal tax policy
should be consistent with the principle of "fiscal neutrality"
in the sense that it does not interfere with the workings of markets
or the decisions of households while minimising disincentive effects
on the level of economic activity.
6. The overall economic impact of the tax system
will depend on how revenue raised gets spent. Government spending
can have a positive or a negative effect on growth, and so, taken
with taxation, the overall fiscal mix can have a positive or negative
effect.
7. The efficiency of the system is also dependent
on the mix of different taxes, their associated bases and rates.
The conclusions of a large body of academic and institutional
evidence as well as the recently published OECD[54]
report is that taxes on property and consumption are more economically
efficient than taxes on income and business inputs. However, an
efficient tax system will rely on mix of different taxes rather
than any one. The Government is committed to improving the efficiency
of the tax system to support the long-term growth potential of
the economy.
8. The efficiency of the tax system is critical
in determining its competitiveness. But other factors, such as
predictability, help provide certainty to enable households and
businesses to plan and invest for the future. Businesses in particular
have signalled that they place significant value on this certainty.
9. Alongside the June 2010 Budget, the Government
published proposals to improve the way tax policy is made[55].
Following extensive engagement with taxpayers and tax representative
bodies over the summer, the Government published its response
on 9 December 2010. In that document it set out a number of concrete
improvements designed to improve predictability, stability and
simplicity in the tax system, with consultation on policy design
and scrutiny of draft legislative proposals as the cornerstones.
The Government has already put some of these improvements into
action through publication of:
— the
Corporate Tax Road Map; and
— draft
clauses for Finance Bill 2011 with accompanying Tax Information
and Impact Notes for each measure.
10. The new approach to tax policy making has
been widely welcomed by business and tax representative bodies.
— Fairness:
the burden of tax should reflect to the ability to pay while
incorporating principles of intergenerational equity.
11. Fairness is a subjective concept and will
depend on the judgements of the Government, Parliament and the
public.
12. There are a number of different ways of considering
fairness. In particular, horizontal and vertical equity. Horizontal
equity refers to the burden of tax on individuals, households
and businesses with the same ability to pay, while vertical equity
refers to the relative burden of taxation on individuals, households
and businesses with differing ability to pay. The Government has
looked at the tax burden using a range of different measures (the
June Budget used income and consumption), as well as the impact
on different groups and changes in the tax burden over time.
13. The Chancellor
stated in his June Budget speech "My
priority in putting together this Budget has been to make sure
that the measures are fair. That all sections of society contribute,
but that the richest pay more than the poorest. Not just in terms
of cash, but as a proportion of income as well".
14. A well
designed tax system will also support fairness by minimising opportunities
for avoidance and evasion.
— Value
for Money: the tax system should be
cost effective. Costs of compliance and collection should be kept
to a minimum.
15. The costs of administering the tax system
are not only those incurred by government in collecting taxes,
but also those incurred by business and individuals in complying
with them. These costs should be taken into account when developing
policy.
16. An effective compliance and collection regime
helps reduce evasion and avoidance. HMRC will invest £900
million of efficiency savings into activities against tax avoidance,
evasion and criminal attack to collect additional revenue of £7
billion per annum by 2014-15. HMRC will also ensure resources
are more effectively focused on collecting revenue and providing
better services for taxpayers.
17. As part of the Government's commitment to
improving tax policy making, it has introduced Tax Information
& Impact Notes (TIINs) which set out the impact of changes
to the tax system and are published at each Budget.
18. Finally, the tax system should be accountable
to the public and Parliament. As part of its commitment to greater
transparency in public policy, the Government is committed to
greater transparency in the tax system. As set out above, consultation
on policy design and scrutiny of draft legislative proposals are
cornerstones to the new approach to tax policy making. The Government
has committed to develop tax policies over a longer policy cycle,
and to publishing more legislation in draft. Increasing the degree
of transparency and consultation in the policy making process
helps make it more effective.
19. It is important to note that there are trade-offs
within and between the principles described above. The Government
is committed to a balanced system that reflects these principles
appropriately. The appropriate balance is a judgment that is—rightly—a
matter for debate and discussion.
How can tax policy best support growth?
20. The Government's priority is returning the
UK economy to balanced, sustainable growth. An economically
efficient tax system that is both competitive and stable helps
minimise distortions and provides businesses with the confidence
to invest and expand. The tax system should also consider the
international mobility of capital and labour in the context of
a highly competitive global economy.
21. The extent to which the tax system impacts
on growth depends on the overall fiscal mix. The economic costs
of taxation must be balanced against the economic benefits of
government spending. If the balance of taxation is biased towards
less economically efficient taxes there is potential for the fiscal
system to act as a long-run drag on growth.
22. Tax policy can help support growth through
both macro and microeconomic channels. At the macro level tax
policy might best be used to support growth through:
— Helping
create confidence through a stable and sustainable fiscal system.
The Government's deficit reduction plan, including the structural
changes to the tax system, has helped restore confidence in the
UK's fiscal position.
— Through
structural reform and rebalancing away from more distortive taxes
towards less distortive taxes. The corporate tax reforms at the
June 2010 Budget are an example of this restructuring.
— To
help correct against trends that might damage the UK's long-run
growth potential and to capture externalities where there are
market failures, in particular, environmental degradation.
— To
help increase confidence in the competitiveness of the UK economy.
As well as reforms to policy itself, a commitment to stability
and certainty can help strengthen the system's competitiveness.
23. At the micro level tax policy can support
growth through incentives to both increase both the level and
quality of economic activity while reducing negative externalities:
— To
help increase the quantity and quality of labour and investment
entering the market. The government has improved work incentives
through (amongst other things) increases in the personal tax allowance
and investment incentives through reducing corporate tax rates.
To what extent should the tax system be structured
to support other specific policy goals?
24. The main aim of the tax system is to raise
revenue. This should be done in accordance with the principles
set out above and should be consistent with the Governments goals.
25. The tax system can be used to support wider
objectives, but if tax policy is used to support these objectives
it should be judged as representing the best value for money with
respect to alternatives such as regulation or spending. In trying
to achieve these objectives, the Government considers the impact
on the tax system as a whole.
26. An example of where the tax system is used
to support a specific policy goal relates to the externalities
associated with environmental degradation. Tax has the particular
advantage of creating a dynamic incentive ie if agents reduce
emissions below a prescribed target they can reduce their tax
liability.
How much account should be taken of the ease and
efficiency with which a particular tax can be imposed and collected?
27. The Government believes that the compliance
burden and collection cost are critical components of tax policy
design, and as set out above, considers minimising these cost
to be a core principle of the tax system. HM Treasury and HM Revenue
and Customs work closely through a joint set of Ministers and
a prescribed policy partnership to improve the interface between
policy design and delivery while ensuring that issues relating
to compliance, avoidance and implementation can be carefully considered.
The Government has introduced a new tailored process for impact
analysis of all tax measures. This will embed impact analysis
in the policy development process and broaden the range of impacts
explicitly assessed. This will ensure that compliance burden and
collection costs are more systematically considered in the policy
making process. Tax Information and Impact Notes will be published
for all tax policy changes.
Are there aspects of the current tax system which
are particularly distorting?
28. Any tax that affects the decision making
process will provide a distortion. The Government aims to eliminate
any distortions as far and as quickly as possible. Some distortions
are an inevitable consequence of tensions between principles and
the complexity of an advanced economy and society.
29. The Government is, however, committed to
a simpler tax system and has set up the new Office for Tax Simplification
(OTS) to help achieve this. Giving weight to simplicity and convenience
in policy design helps ensure that, as far as possible, reforms
minimise transitional costs on business and the burden of complying
with the tax system.
January 2011
53 Smith, A. "An Inquiry
into the Nature and Causes of the Wealth of Nations" McMaster
University Archive for the History of Economic Thought Back
54
??? Back
55
Tax Policy Making: a new approach, June 2010. http://www.hm-treasury.gov.uk/tax_policy_making_new_approach.htm) Back
| 
