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The quiet influence of the Mirrlees Review

Ordinarily, what the IFS has to say on any subject is voluminously reported in the media. Its reaction to the budget has become the regular second-day story for how the press covers the most important fiscal event of the year. So it was somewhat unusual that very little media attention was paid to the Mirrlees Review – the IFS’s fundamental review of the UK tax system – when it was published last year.

Despite this lack of press coverage, the influence of the Mirrlees Review has been quietly building. In recent weeks, theFinancial Times and the Economist have both referred to it as a ‘good foundation’ upon which to build long-term tax reform. David Laws wrote in a similar terms last year in an important article on tax reform and Liberal Democrat advisers are surprisingly conversant with the detail of the review’s conclusions.

Mirrless laid out three key principles for a tax system:

  • that it should be considered as whole, not in parts
  • that it should be neutral with respect to different forms of economic activity, as far as possible
  • that it should be progressive.

The review then translated those principles into a set of big real-world recommendations: integration of tax and National Insurance; a single integrated benefit for those on low incomes or with high needs; a uniform VAT rate; consistent pricing for carbon and a well-targeted tax on congestion; a lifetime wealth transfer tax to replace Inheritance Tax; a Land Value Tax, and so on.

One can immediately see the appeal of these recommendations to Liberal Democrats, consistent as they are with many of the party’s long-cherished attachments to the fair taxation of land, wealth and environmental bads, and greater fairness and simplicity in the taxation of earnings. But the review’s agenda for simplification and transparency also holds appeal for Conservatives, and the Chancellor’s newly formed Office for Tax Simplification has already backed the call for an integration of tax and National Insurance, the abolition of unnecessary tax reliefs, and a fundamental review of Inheritance Tax.

From advance briefings, we know that tomorrow’s budget will seize the baton on at least one of the big ticket items in this list: the integration of tax and National Insurance. This is a valuable and sensible objective, one which we at ippr recommended back in 2005, in our report Social Justice. National Insurance is effectively a payroll tax already and the contributory principle only supports some 10 per cent of working-age benefits. The biggest contributory benefit is the Basic State Pension but, as Mirrlees notes, it is in effect already open to the vast majority of people, because of crediting-in payments for those with interrupted contribution records and the relative generosity of the 30-year qualifying period.

That said, there are scores of winners and losers in any reform this big and the Chancellor is unlikely to push for rapid integration, so much as set out a path towards it. Pensioners lose out if their earnings and savings income are taxed at 32% or 52% over the state pension age, rather than at the headline income tax rates. Anybody earning more than the National Insurance Upper Earnings Limit would also pay more unless a new tax schedule was devised, and a new payroll tax would need to be levied on employers if they no longer had to pay National Insurance. There are countless other bumps along this road.

But integrating tax and National Insurance makes other welfare reforms easier. In particular, it paves the way for a single-tier Citizen’s Pension of £140 a week and further reform of contributory sickness and disability benefits. These are fiendishly complex in their own right, however, and also need long lead-in times. They also carry with them one major headache: without contribution records, benefits are readily to available new migrants. As one minister put it recently in private, the big winners are axe-murderers who have spent their lives in prison, and newly arrived immigrants. This is hardly an election-winning coalition.

There are lessons here too for Labour. The party should recognise that simplicity is a virtue and focus any major future commitments on clear, easy to understand services or benefits, like universal childcare. The party gained a reputation for complex meddling in the tax and benefit system in pursuit of its social objectives, and for shying away from bold reforms in its last years in office (scarred as it was, understandably, by the 10p tax rate debacle). It will now compete electorally with parties committed to simple, easy to understand taxation politics: replying with targetted, complex measures will not work.

Second, it will no longer be able to rely on pledges not to raise the basic and top rates of income tax while falling back on National Insurance to fund its public spending ambitions, as it did from 1997 onwards. This will make the tax and spend debate more transparent, which is infinitely preferable terrain for Conservatives who want to offer tax cuts. Accomplished political strategist that he is, George Osborne will undoubtedly have this endgame in mind.

Finally, the party will have to abandon any lingering ambition that reciprocity in the welfare state – the ‘something-for-something’ deal that squeezed-middle voters hold so dear – can be founded on the contributory principle. It must not abandon the quest to ground more firmly the entitlement to services and benefits in mutual obligations to contribute, since the desire for strong reciprocity is deeply rooted in us all. But it will have to find means of achieving that goal other than a reinvention of the contributory principle as we have known it.

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