The present tax system has certain inefficiencies- both current and emerging, which are detrimental to economic development and productivity. Future budget pressures primarily driven by an aging population would make governments of all political colors increase public spending to retain conditions like the current standard and reach of public services and welfare (Lopreite and Mauro, 2017). Meanwhile, challenges to existing tax bases (such as fuel duty), tax evasion by affluent trusts and the extension of existing lightly taxed ones (such as self-employment) suggest that the tax system needs to be reformed in order to sustain current spending levels as a proportion of gross domestic product (GDP).
It is no surprise that a world devastated by covid-19 pandemic caused an increase in the public spending on social care and health facilities. Due to the rise in unemployment many households claimed benefits (Carr, 2020). This, in return, has burdened the economy and hence diverted public spending. The government is losing revenue due to loopholes in inheritance tax which the wealthy avoids by establishing trusts. On the contrary, the self-employed are much more lightly taxed than job holders. The long-standing inefficiencies in the tax system create instability and burdens the economy leading to hindrance in development. Therefore, a tax reform is the need of the hour. And room for such reforms is facilitated by the fact that the public is eager to accommodate such changes due to the covid-19 pandemic. There are many areas where the UK can reform the tax system, but by focusing on certain specific areas (Such as wealth tax, fuel duty, child tax credit and VAT on goods and services which have zero rating), the government is more likely to raise a huge amount of revenue.
The VAT on goods and services in the UK are negligible in comparison to most developed countries. Taxable commodities include house-building, passenger, transport, children’s clothes and books. Annually, the UK forgoes around £19 billion a year. In other countries around the world VAT is charged at a standard 20%. The UK government forgoes around 50 billion a year from zero rating (Miller, 2020).
The tax system can be reformed by introducing 20% VAT on the goods mentioned above. However, it would be a regressive idea as poorer people spend a large amount of their budget on these items. Whereas, people with affluent lifestyles spend more and therefore they save more in absolute (cash) terms of VAT. The revenue gathered after introducing 20% VAT would be enough to invest back in social services. For instance, increasing child benefit so that half of the poor households are not worse off on average. To make its impact more neutral, the incomprehensive application VAT creates some scope to broaden the base of vat. For instance, consumption taxes affect all- such as households income, capital, labour income and transfers- while labour taxes only affect workers. The abolishing of vat zero rating would ease the burden of taxation evenly.
Introducing a general tax on all goods and services affects the poorer sections of society more. However, with the offer of social incentives, public outcry might not be very severe- especially in a pandemic situation where most of the poor households are reliant on social benefits. Any increase in social benefit would be welcome. Interestingly, the UK government schemes during covid-19 have been more generous in comparison to the rest of the world.
Self employed tax
Amidst the pandemic, the health sector and the emergency sector has laid bare the vitality of the employees who risked their lives in order to save people and the British health system. Employees make up to 85% of the workforce in the UK. However, in the last eight years, 39% of growth in the workforce has been contributed by people who are self employed and company owners and managers. It is unfair to the 85% of the workforce who are frequent taxpayers and contribute to national insurance more than the 15% who work for themselves (known as self-employed) (Adam, Miller and Pope, 2017).. For instance, if an employee earns £15000, a tax of 20% is imposed on the earnings after a personal allowance of 12000. Tax on an employee is around £600 higher than a self-employed person annually. This is around 800 GBP higher than the amount payable by a company owner or manager. The office of budget responsibility estimates that the growth in the recent past in small companies will cost them around £3.5 billion in 2021–2022, unlike the rest of the world where employment and small companies grew at an even pace. Offering lower taxes to individuals is damaging the economy. This unfair system of taxation makes self-employment appear more attractive and adds a negative effect on employment. As a result, people tend to get registered as a company rather than an employee. This leads to payment of different amounts of taxes by different individuals who earn the same amount of money. On an average, a self employed person pays 1240 GBP less than an employee annually. If their NICS were the same as that of the employees, the self-employed would pay £8 billion instead of 3 billion a year.
It is challenging to extract the information about the income of self-employees and tax them accordingly. However, there is one way in which the government can raise the revenue and equal the scale between employees and self employed. It is by raising the national insurance contribution for self-employed. Because if taxes are increased, the loopholes of showing higher expenses remain the same and many take advantage of it. Another way of doing it is to calculate the benefits self-employees receive. For they will happily contribute if their benefits are considered.
Fuel Duty
Fuel duty earns around £28 billion a year from the usage of fuel for the British economy. However, the drivers determine the revenue by buying and selling cars. And most importantly switching to fuel efficient or electric vehicles, the revenue from fuel will be under immense pressure and it can be lost entirely if all vehicles are switched to electric. Current policy of banning the sale of petrol and diesel cars by 2040 has been challenged by the House of Commons business energy committee to bring it down to 2032 in order to achieve the targets set by the government reducing emissions( Leggett, 2018).. Since the cost of charging electricity is much less than petrol, the government can increase road tax, using motorway charges and payments. This happens between France and Germany. On the other hand, taxes can be applied on electric cars when all vehicles are electrified. However, it would not be a good strategy to do it now because it will discourage people from switching to electric cars. Once all vehicles in the UK get electric, a percentage of tax can be applied to raise revenue and companies will not have any choice but to pay. However, the government must compensate companies in other areas such as business rate. This way business will not be discouraged to come to the UK.
Trusts and taxation
Trusts hold assets for a trustee before they are passed onto a beneficiary. They are simply a legal arrangement that allows trustees (the asset’s owners) to place their money, investments or property with a third party. The assets are then passed to the trust’s beneficiary on a later date. Once the assets are held in a trust they no longer belong to the trustee. They belong to the trust. Therefore, these assets are not liable for inheritance tax when the trustee dies. Trust can be used as a way to look after the asset for a beneficiary until they come of age or meet other specified criteria. A trust can be set up by anyone. It just costs around £1,000 with the consultation of a professional solicitor. Many wealthy families pass on assets to trustees in order to avoid taxation. This somehow burdens the economy and reduces revenue. To avoid this, it is essential to introduce wealth tax.
An all-in-one tax should be imposed on all owned assets instead of compartmentalising specific property categories. All assets here refers to the net wealth, that is, personal assets without the debts. This tax should not be associated with other wealth related tax systems like inheritance tax. In a survey conducted by (Bowen, 2020), it was found that the respondents supported the introduction of wealth tax as a mode of increasing substantial revenue. Such a retrospective tax would be fair and difficult to avoid. This is because is the policy is declared with a same day reference date or with a reference date that approaches soon, there would be very less room to escape it. However, a disadvantage to this scheme is that it does not consider subsequent changes in wealth.
It would also be a one-off response to individuals in crisis, who would be taxed one single time depending on the amount of wealth they possess at that time. They can then pay the tax in instalments over years. This would also hike up substantial income. If individuals were taxed at wealth above £500,000 and paid 1% per year for 5 years, it would raise £260bn. If the threshold were £2m, it would raise £80bn. This amount is payable by individuals whose total wealth exceeds the tax threshold and on the amount of wealth above that threshold. Other modes of raising such money includes options like raising the basic rate of income tax from 20p to 29p, increasing VAT rates from 20p to 26p and more. However, these may not be favorable to the masses.
Instead, imposing tax on the individual will be easier to integrate for it is consistent with most personal tax systems. Such a tax will also be more economically reasonable in the sense because citizens’ behavior will not be diverted unlike in taxes like income tax which reduces incentives to work and increase in capita gains tax that reduces investment. In other words, such a scheme will raise money from the wealthier of the society and not affect the general public.
The figure above shows the arguments in favour of wealth tax, looking into the response of people it is illustrated that the income disparity in the uk is huge. Therefore, levying wealth tax is a sensible option since other taxes would spur already suffering public reactions. The only few in society would be affected but by in large it will be a fairer option to adopt.
Parliament’s select committee for treasury needs to hold more meetings and hold the government to account regarding taxation and revenues Moreover, a special team of intelligence units needs to be made in order to keep check on trusts and charities. The taxation system is a complex system but reforming it is much more needed than any other time. The current situation caused by the pandemic will make the economy worse before it gets better and therefore, radical reform policies need to be adopted.
An independent body consisting of public, think tanks, experts and academia should be formed in order to keep check and forward their recommendation to exchequer. The body will be free from political influence and suggests what’s best for Great Britain.
References
Adam, S., Miller, H. and Pope, T. (2017) Differences in the way the tax system treats the self-employed, owner-managers and employees are costly, inefficient and unfair, [online] Available at: https://www.ifs.org.uk/publications/8873 (Accessed 28 January 2021).
Bowen, K. (2020) A wealth tax for the UK?, PKF Francis Clark, [online] Available at: https://www.pkf-francisclark.co.uk/blog/a-wealth-tax-for-the-uk/ (Accessed 28 January 2021).
Carr, E. (2020) ‘I didn’t want to tell anyone I was claiming benefits’, BBC News, 13th October, [online] Available at: https://www.bbc.com/news/business-54507291 (Accessed 28 January 2021).
Leggett, T. (2018) Diesel and petrol ban should come much faster, say MPs, BBC News, 19th October, [online] Available at: https://www.bbc.com/news/business-45899580 (Accessed 28 January 2021).
Lopreite, M. and Mauro, M. (2017) The effects of population ageing on health care expenditure: A Bayesian VAR analysis using data from Italy, Health Policy, 121(6), pp. 663–674.
Miller, H. (2020) Don’t waste a good crisis: reform taxes to make tax rises less painful, [online] Available at: https://www.ifs.org.uk/publications/14989 (Accessed 28 January 2021).
Tetlow, Gemma (2019) The tax system needs changing to meet the needs of the future, The Institute for Government, [online] Available at: https://www.instituteforgovernment.org.uk/blog/tax-system-needs-changing-meet-needs-future (Accessed 28 January 2021).
