Matthew Elliott: Response to the Tax Reform Commission's proposals

Matthew Elliott is the Chief Executive of the TaxPayers’ Alliance.

Regular readers of ConservativeHome will know the difficulties the Conservative Party has been having with tax in recent times. We don’t think it would be unfair to say that the Conservatives haven’t really had credible policies on tax for a while. 

Lord Forsyth has gone a long way towards addressing this by producing an excellent new report from his Tax Reform Commission.  We would like to think this will form the basis of the Party’s policies on taxation in this Parliament (although George Osborne’s comments yesterday suggest this is far from likely). 

The TaxPayers’ Alliance would have gone further than the report in a number of areas, but we think that implementation of the report’s proposals – by any Government – would be an important first step in the right direction for Britain.

We welcome four proposals in particular. Firstly, reducing the basic rate of income tax to 20 per cent would save a taxpayer on average earnings around £300 a year. 

Secondly, raising the threshold at which people start to pay income tax by abolishing the starting rate would save most taxpayers a further £215 and would take around 2.5 million people out of income tax altogether.

Thirdly, abolishing inheritance tax and exempting the main home from the reformed capital gains tax would mean that most families would not have to worry about paying taxes when a relative dies. And fourthly, reducing the main rate of corporation tax to 25 per cent would help to restore Britain’s competitiveness and reduce the number of businesses who are considering leaving our shores. 

We also support the proposals to simplify the tax system and remove some of the ineffective allowances and reliefs.  We are also pleased with the proposal to set up a dynamic model for the UK economy, which would show how tax changes really affect economic activity and Government revenues (something we have been campaigning for for a while). 

The report comes at an important time.  Last week’s OECD Revenue Statistics publication showed that the UK now has a higher tax burden than Germany.  Separate OECD figures show that the UK’s main rate of corporation tax is now higher than the OECD average. Britain is not surprisingly falling down the world competitiveness league tables. 

The result of this is that families and businesses are being more tightly squeezed than ever.  Households’ discretionary income is falling, the number of people being hit by higher rate income tax is rising, and the average household now pays over £600,000 in direct and indirect taxes over a lifetime. At the same time warnings about companies leaving Britain because of high and complex taxes are coming through thick and fast. 

If implemented, the report’s proposals would be a sensible step in the right direction.  But they would only be, of course, a first step.  After all, the tax burden would fall by around 1.5 per cent of GDP – not enough to reverse the rise of the last two years. We therefore think that the report could have gone further in a number of areas. 

For example, whilst exempting the main home from any sort of tax on death would be better than the current inheritance tax system, families would still have to pay tax on other assets the deceased held for less than ten years, under the reformed capital gains tax.  A “rollover relief” (like in Ireland) would mean that tax is only paid if the family sells the deceased’s assets.  Also, raising the absurdly low threshold at which people pay higher rate income tax would take middle earners out of paying the top rate.   

The Commission could have gone further elsewhere.  Reducing the main rate of corporation tax to 20 per cent as quickly as possible would mean that Britain was ahead of most European countries (although Ireland’s main corporation tax rate is only 12.5 per cent) and fully merging national insurance and income tax would reduce administrative burdens for small businesses and mean that people would see how much tax they truly pay. 

Overall, we think this is an excellent report – one which has been overdue from the Conservatives for some time. David Cameron and George Osborne should listen to the concerns of taxpayers and accept the proposals.