20 August 2019

Sajid Javid’s talk of a simpler, more efficient tax regime is welcome, but it will be harder to achieve in practice than the chancellor's comments suggest, says Gemma Tetlow

After three weeks of making new spending pledges, the new government has finally started talking about the other side of the ledger: tax. Unlike its promises on spending, there are no firm details. The one concrete policy that was floated – on stamp duty – has already been downplayed.

The outline of Javid’s fiscal and tax objectives is starting to take shape

Despite the lack of detail, Javid’s comments did hint at the sort of policies he might pursue. The chancellor said: “the most important thing is making sure you’ve got borrowing under control”, implying he will retain some form of rule constraining annual public borrowing – though he suggested this could be looser, allowing more borrowing for investment, than the one he inherited from Philip Hammond.

And while he generally “want[s] to see lower taxes”, Javid also noted that these must nonetheless be set “at a level that is going to pay for the public services”. However, by only expanding the state’s offer to those public services, the government has limited any scope for net tax cuts.

Talk of improving efficiency is welcome, but Javid must be guided by evidence not ideology

Javid hinted that a free lunch could be had from reforming the tax system: “I think taxes should be efficient. We want to set them at a rate where we are trying to maximise revenue, and that doesn’t always mean that you have the highest tax rate possible.”

The suggestion that he wants to make the tax system more efficient is welcome. As we set out in a recent report, the UK tax system is riddled with inefficiencies and could raise the same amount of money while doing less to discourage or distort economic activity. But the new chancellor must look to the evidence, not ideology, for guidance on how to make the system more efficient. The implication in his remarks – that you could cut the main rates of major UK taxes and still raise as much, or more, revenue – is almost certainly wishful thinking.

Two narratives have gained momentum. First, that past corporation tax cuts have led to an increase in revenues. Second, that there is scope to cut the highest rates of income tax without much affecting revenues. But the evidence does not support either view.

Analysis by the Institute for Fiscal Studies (IFS) suggests that corporation tax receipts would in fact have grown even more if the rate had not been cut. And while cutting the top rate of income tax from 50p to 45p was estimated by the Office for Budget Responsibility to cost only £100 million a year, this modest sum reflects the fact that “the additional rate is now assumed to be close to its revenue-maximising level”. The implication is that further cuts to the top rate (or any of the other rates) of income tax would cost the exchequer much more.

There are areas of inefficiency in the UK tax system. But the idea that any major UK tax rates are currently at a level where rate cuts would boost total revenues is unlikely to stand up to much scrutiny.

Javid is not the first chancellor to aspire to have a simpler tax system

Javid’s desire for “simpler taxes” is also laudable. But he is not the first chancellor to have such aspirations. To succeed where others have failed, he will need to resist the temptation to exploit his near-monopoly on tax policy to tinker with the system. The chancellor will also need to successfully take on the many special-interest groups who benefit from the tax system’s current complexity.

Maintaining Hammond’s commitment to holding only one fiscal event a year would be a good start. But there is more that could be done, as we set out in a recent letter to the chancellor (jointly written with the IFS and the Chartered Institute of Taxation).

Spelling out the details of a tax strategy will be harder in practice

It is welcome that Javid has started spelling out some principles that will guide his tax plans. Having a strategy can help to avoid ad hoc tinkering, may help the government make the case for otherwise unpopular changes and will provide businesses and individuals with a clearer sense of where the tax system is heading.

But the chancellor still has much to explain. If, as seems likely, headline rates of income tax cannot be cut (and thresholds cannot be raised) without cost, how does the government plan to pay for the tax cuts mooted by Boris Johnson during his election campaign? Which areas of the tax system does Javid propose to simplify or make more efficient? If those changes are to be done without reducing overall revenues, how will he convince the inevitable losers that change is needed? 

Setting out his broad ambitions is the easy part. For now, however, most of the difficult questions remain unanswered.