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Changing Tax: pressing reset on the UK’s tax base

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Changing Tax: pressing reset on the UK’s tax base

  1. 1. ChangingTax Pressing reset on the UK’s tax base Matt Whittaker November 2016 1 @MattWhittakerRF // @resfoundation
  2. 2. 2 WHAT GOES DOWN… Following record falls in 2008 and 2009, recovery in government receipts has disappointed
  3. 3. The financial crisis sparked the sharpest fall in real- terms government receipts in 50 years 3
  4. 4. Following this drop, receipts were initially projected to recover relatively rapidly 4
  5. 5. But they came in £63 billion lower in 2014 than the £720bn projection 5
  6. 6. The March 2016 projections implied the old £720 billion figure would arrive in 2017 instead, three years behind schedule 6
  7. 7. But already these numbers are looking too optimistic: 2015 came in lower and the first half of 2016 has been disappointing 7
  8. 8. Expectations for slower economic growth following the EU referendum mean the £720bn total now looks like arriving four years late, in 2018 8
  9. 9. 9 TAX CUTS IN AN ERA OF FISCAL TIGHTENING Some of the revenue ‘disappointment’ of recent years is actually the result of deliberate policy choices
  10. 10. Above-inflation increases in the personal allowance have raised the tax-free portion of income by around £3,800 relative to the default policy 10
  11. 11. Corporation tax has also been cut sharply since 2010, with the main rate dropping from 28% to a proposed 17% 11
  12. 12. The third major tax cut relates to fuel duty, where both the inherited ‘accelerator’ and the default index- link have been abandoned 12
  13. 13. These big giveaways were expected to cost roughly £32bn this year and £41bn by the end of the parliament 13
  14. 14. These tax cuts are one of the reasons why overall tax policy has played a minority role in the process of fiscal consolidation to date 14 Over the last parliament, the net effect of all tax policy changes was to increase government borrowing (by 0.1% of GDP)
  15. 15. In the absence of these major tax cuts, the new Chancellor might have been able to point to a current budget surplus this year 15
  16. 16. He would also remain on course to deliver an overall budget surplus in this parliament, as targeted by his predecessor 16
  17. 17. 17 BROAD SHOULDERS: NARROW BASE Policy shifts matter not just for levels of revenues and borrowing, but for the sustainability of the tax take too
  18. 18. A combination of economic factors and politics has fed into a longer-term change in the composition of UK receipts 18
  19. 19. While the big taxes still dominate, we’ve seen a plethora of new smaller taxes in recent years raising questions over efficiency and coherence 19
  20. 20. As well as ‘what’, there’s been a change in ‘who’: the richest 10 per cent of households now account for roughly 40p of every £1 collected – up from 25p in 1977 20
  21. 21. This matches growing income inequality during the 1980s, but more recent changes owe something to policy as well The flat average tax rate in the group suggests that it is the product of a narrowing base rather than a heavier burden, though average rates have risen significantly at the very top 21
  22. 22. Revenues have become more concentrated post-crisis partly because an increasing share of the population has paid no income tax 22
  23. 23. With this fall coming even as the share of the population in work has returned to its pre-crisis levels 23
  24. 24. In part, this shift is associated with a change in the type of employment held by workers since the crisis 24
  25. 25. But the declining tax base is also a product of increases in the tax threshold that have rapidly outpaced earnings growth 25
  26. 26. While the overall share of the population paying income tax has fallen, the share paying higher rate and above has increased 26
  27. 27. The result is that an increasing share of income tax comes from a relatively small group of higher earners 1999-00 27
  28. 28. The result is that an increasing share of income tax comes from a relatively small group of higher earners 2007-08 28
  29. 29. The result is that an increasing share of income tax comes from a relatively small group of higher earners 2015-16 29
  30. 30. Which brings (upside and downside) risks due to the volatility of top incomes across the economic cycle 30
  31. 31. 31 CHANGING TAX The new Chancellor has the opportunity to reprioritise tax and spending in the Autumn Statement
  32. 32. The size and shape of the UK’s tax base – and the extent to which these have shifted in recent years – matter for revenue levels, equity and sustainability 32 • We’ve seen lots of tax rises since 2010 as part of the government’s drive to close the budget deficit, but these have been largely offset by major cuts  so much so that Philip Hammond could have been looking forward to unveiling a current budget surplus later this month in the absence of previous cuts • Government’s approach to tax affects the equity and sustainability of revenue too, with too little attention being paid to these issues  sense that too many decisions have been ad hoc in nature and income tax policy in particular has targeted gains on the top half of the income distribution
  33. 33. In pressing the fiscal ‘reset’ the Chancellor should abandon his predecessor’s pursuit of narrowing the tax base 33 • Rethinking tax strategy can both support the public finances and free resources for more targeted support for ‘just managing families’  given the changed circumstances, the Chancellor should move away from further expensive plans to raise the personal allowance higher rate threshold by 2020, costing roughly £2bn at a time when the public finances are already facing a deterioration of £20bn annually by the end of the Parliament  he should also drop plans for further cuts to corporation tax that are not necessary for the UK to maintain a highly competitive tax regime
  34. 34. ChangingTax Pressing reset on the UK’s tax base Matt Whittaker November 2016 34 @MattWhittakerRF @resfoundation