Taxing times: Policies, politics, and principles

Britain’s tax system isn’t fit for purpose. As this paper shows, the historical evolution of our tax system has produced one marked by a great deal of complexity, but which struggles to raise the revenue required to meet the public’s demands on the state.

At the same time, almost two decades of weak economic growth and an ageing population have left British taxpayers in an invidious position: where the critique of the public was once that they wanted a European-style welfare state on American levels of taxation, they are now facing something more like an American-style welfare state on European levels of taxation. Fiscal pressure will only continue to grow as our population ages, immigration falls, and governments grapple with the demands of our growing defence needs and the climate transition. 

Many sensible proposals for tax reform have been put forward over several decades. But few really big reforms have come to pass. This paper attributes that inertia to three pathologies.

1. A public pathology, whereby the British public shies away from the tax implications posed by their expectations of public services.
2. The political pathology, whereby in response to the public pathology, politicians have continually sought easy fixes – like freezing thresholds or stealth taxes – rather than confront the public with honest fiscal truth.
3. The press pathology, which amplifies the losers of any tax rise, and distorts political debate and public perceptions. 

Funding

We will need to raise more revenue, and soon. How do we raise enough money over the next five to 10 years?

• There are limits to the revenue that governments can raise while leaving the ‘big three’ taxes – income tax, employees’ national insurance (NI) contributions and VAT untouched. One option mooted is to reverse the Conservatives’ 2022–24 NI cuts, which – especially if hypothecated – could command public support.
• The most obvious alternative in the immediate term would be equalisation of capital gains tax with marginal rates of income tax, offset by an investment allowance.

Fairness

The current tax system has become too tilted in favour of age and wealth. How can we adjust the balance of responsibility to reflect a new fiscal contract between groups in society over the medium run? Proposals include the following.

• Extending the 2 per cent NI surcharge, currently paid by employees under 65 on earnings above the upper earnings limit (£50,270), to pensioners.
• Replacing stamp duty and council tax with a new proportional property tax. A rate of around 0.65 per cent would be required to compensate for the revenues of both the abolished taxes.
• Taxes on speculative, extractive industries – what the author calls ‘Spiv Britain’ – including a tax on the net gambling winnings of amateur gamblers, which could raise £1–3 billion; greater auditing and monitoring of crypto asset sales; and on commercial property transactions.

Future

How should Britain’s tax system be prepared for the wealth concentration – and potentially mass unemployment – brought about by AI and related transformations? 

• A progressive consumption tax, offset with a tax-free consumption allowance, negative income tax or universal basic income, in response to widening inequality.
• An AI token tax, to directly trap a portion of the value created by AI models. Given that this would require consistent auditing of AI companies, it would likely rely on international cooperation.
• An AI unearned rents tax, in the extreme scenario in which AI wealth is extremely concentrated and tax on capital is necessary to sustain consumption for the majority. 

Together, such measures are designed to outline a tax agenda which not only raises revenue and takes on the myriad economic inefficiencies and perversities of the existing system, but which can also bring British citizens along with it. But that will rely on politicians willing and able to tell a convincing story about rebalancing the tax system so that it is fairer to the young and those in work, and is equipped to harness technological changes to the benefit of all British citizens.