Cross-party agreement can create political space for tax reform

One of the great frustrations of working on tax policy making is the gulf between what most experts acknowledge are the problems with the UK’s tax system and the aversion that successive governments have shown to trying to ameliorate any of them – with many chancellors making things worse. As we have highlighted in previous work, there are many barriers to governments making serious reform of the tax system. 

A new report this week tries to tackle some of those by setting out seven packages of reforms that nine prominent organisations from across the political spectrum (and some with no political affiliation) all agree would “move the UK towards a fairer, more effective and more pro-growth tax system”.  ¹⁰ https://centax.org.uk/tax-reforms-for-growth/  The signatories include people from organisations from the New Economics Foundation, ippr and Labour Together on the left of politics, to Bright Blue, the Centre for Policy Studies and the Adam Smith Institute on the right.

The packages are also consistent with the recommendations of the definitive Mirrlees Review of the UK tax system that was published by the Institute for Fiscal Studies 15 years ago.  ¹¹ https://ifs.org.uk/mirrlees-review

Many aspects of tax distort or discourage economic activity unnecessarily

There are many areas of the UK tax system which distort economic behaviours for no good reason or do more to discourage work, investment and mobility than needs to be the case.  The tax system could be reformed in a way that raises at least as much money but does more to promote growth. If the government is serious about the priority it is giving to growth, reform to the tax system is an area where change is both needed and within its control. 

Taking examples from this week’s report,  ¹² https://www.telegraph.co.uk/business/2025/11/05/britains-tax-system-is-actively-holding-back-the-economy/  VAT in the UK is applied to only half of spending. That incentivises producers to spend time, effort and money trying to establish that their products should not be covered – see, for example, the current court battle over whether giant marshmallows (like mini marshmallows) are an ingredient for cooking and so VAT-free, or (like standard sized marshmallows) are a sweet and so subject to 20% VAT. A single, lower VAT rate would remove these incentives and administrative complexity, and government could target losers much more effectively through other means.

Effective marginal income tax rates are extremely high at some income levels. For example, because parents cease to qualify for any childcare support once their income exceeds £100,000, parents can face a huge financial penalty if their earnings rise even marginally above this level. This strongly disincentivises some parents from working more hours or accepting a promotion. The withdrawal of child benefit from those with income above £60,000 also creates a high effective rate of tax on income for some people at that point. Income tax could be changed to raise just as much money from higher income people (if that was the government’s objective) but without providing this strong discouragement to economic activity – for example, as the report suggests, by raising the higher or additional income tax rates or lowering the thresholds at which these rates kick in. People on the taper for Universal Credit can also face very high effective tax rates. 

Understanding of the tax system is poor and losers shout loudly

There is almost always someone who gains from the current tax structures and who will complain vociferously if attempts are made to change any of these features. The beneficiaries of these sorts of efficiency enhancing tax reforms are normally a diffuse wider group of taxpayers, who may benefit from marginally lower tax rates (if tax breaks for others are removed) and stronger economic performance (as distortions and disincentives are pared back). 

One of the major difficulties for government in making such tax reforms is that understanding of the UK tax system is poor among the wider public – in no small part due to the complexity of the system. That makes it hard to explain the perversity of the current system and the expected benefits of the reforms to counter the vocal objections from those who are set to lose out.

Setting out where experts with different political views agree should take some political heat out of growth-enhancing reforms

This report – and any other similar types of initiatives – should help to focus attention on where there is broad agreement about the problems with the UK tax system and take some of the political heat out of attempts to reform these areas. This is a valuable contribution that has been absent previously from the UK debate, despite widespread and long-standing agreement behind the scenes among many experts.

Exactly which aspects of the seven reforms any government would adopt and exactly how they would implement them will depend on political preferences. For example, the report presents the options as revenue neutral, but some politicians may wish to raise taxes, while others may wish to cut them. But it is very valuable to highlight where there is agreement on the broad direction of travel required to create more space for politicians to make progress on these many long-standing problems which are holding back UK growth.