The coronavirus crisis has generated one of the greatest shocks to the UK’s economy in the past 300 years. It has accelerated the UK’s public debt at the fastest rate ever seen in peacetime. After the crisis has passed, it will have exacerbated the long-term pressures on the public finances that are projected to see revenues and spending diverge indefinitely if no action is taken.
Our expert witnesses said that now is not the time for tax rises or fiscal consolidation, which could undermine the economic recovery. However, the public finances are left more exposed to rises in interest rates. Significant fiscal measures, including revenue raising, will probably be needed in future.
In our September 2020 report on Economic Impact of Coronavirus: The Challenges of Recovery, we concluded that the Chancellor should, at the next fiscal event, set out an initial roadmap of how he intends to place Government finances on a sustainable footing. A reassurance that the Government intends to take steps to ensure fiscal sustainability in future will underpin market confidence and reduce uncertainty for households and businesses that may fear immediate tax rises.
The public finances are on an unsustainable long-term trajectory that has been exacerbated by the coronavirus pandemic. Additional tax revenue could make a contribution to addressing this. But the tax measures that are most politically palatable in the short term are often not those that minimise distortions to economic activity in the longer term. This is a large-scale and long-term challenge that requires taking a view of the whole tax system, how it can be reformed, and how it can raise revenue in a way that minimises economic damage as well as effectively supporting public services, which can in turn promote growth.
Some firms and sectors have seen a significant increase in turnover as a result of the pandemic, and some witnesses made arguments in favour of a windfall tax on the profits which have resulted. There are downsides to a windfall tax, including its potentially retrospective nature. There would also be complexities, including the difficulties of identifying sectors to which any such tax should apply, ensuring that such a tax is fairly targeted at firms which have benefited excessively within those sectors, and identifying the element of a firm’s profits which could be reasonably attributed to excessive profits generated by the pandemic. For these reasons, introducing such a tax would be problematic, but that is not to say that it would be impossible to introduce a windfall tax in certain circumstances in the future, if that was the political choice made. The Treasury would clearly need to conduct a thorough assessment of its feasibility and of the revenue which it might raise.
We believe that the development and administration of an annual wealth tax would be extremely challenging, and we would not recommend it. It is recognised though that were the wealth to income ratio to increase considerably, the political arguments for some form of wealth tax would become stronger.
Though those who gave evidence were sceptical of an annual wealth tax, there was more support for a one-off wealth tax. It could be used to raise significant revenue. However, amongst witnesses there were significant reservations that a tax imposed once can be imposed again, and that such a tax might be seen as retrospective.
Any increases in the rates of income tax, national insurance or VAT were ruled out in this Parliament by the Government’s “tax lock” manifesto commitment. It is clear to the Committee that the manifesto commitment of the Conservative Party will come under pressure under the current circumstances.
Careful consideration would need to be given to any potential increases in income tax, VAT and national insurance contributions, taking into account the degree to which any increases
Increases in national insurance contributions may be especially difficult given the probable impact on jobs, at a time when increasing employment is likely to remain an economic priority.
While we have not heard enough evidence to recommend a wholescale merger of national insurance contributions and income tax, the Government should consider what can be done to remove the distortions gradually through time.
We do not recommend any significant changes to the scope of VAT.
The Government should, following consultation, set out principles and objectives for the VAT system, now that VAT is free from EU law. The Government should ensure that the principles balance revenue raising, economic growth and other objectives, such as improving the quality of the environment and “levelling up”.
A moderate increase in the corporation tax rate could raise revenue without damaging growth, especially if balanced with fiscally appropriate measures to help business, such as enhanced loss relief and capital allowances. However, it is clear that a very significant increase in the rate would be counterproductive.
Given the regressive nature of the benefits accruing to individuals from the current arrangements on pension tax relief, especially those in the top earnings decile, the Chancellor should urgently reform the entire approach to pension tax relief.
We believe that when reviewing the burdens of taxation for the employed and self-employed and limited companies, the Government should also review the taxation of pensions and the tax relief applicable to pension payments.
We strongly believe that a major reform of the tax treatment of the self-employed and employees is long overdue. The current system is confused, unfair and unsustainable. The review should incorporate the benefits which accrue upon payment of NICs and other taxes as well as the level, the incentives and the interaction of such taxes. It should look as far as is possible to eliminate the so-called ‘three person problem’ altogether.
The Government should treat stamp duty land tax as a priority for reform and should set the tax at a level that optimises revenue while encouraging home ownership. Any review should take into account the impact of any UK changes on equivalent devolved taxes.
The Government should draw up a draft tax strategy for consultation, setting out what it wants to achieve from the tax system and identifying high level objectives. Any such strategy should include principles for: