1.
ChangingTax
Pressing reset on the UK’s tax base
Matt Whittaker
November 2016
1
@MattWhittakerRF // @resfoundation

2.
2
WHAT GOES DOWN…
Following record falls in 2008 and 2009,
recovery in government receipts has
disappointed

3.
The financial crisis sparked the sharpest fall in real-
terms government receipts in 50 years
3

4.
Following this drop, receipts were initially projected to
recover relatively rapidly
4

5.
But they came in £63 billion lower in 2014 than the
£720bn projection
5

6.
The March 2016 projections implied the old £720 billion
figure would arrive in 2017 instead, three years behind
schedule
6

7.
But already these numbers are looking too optimistic:
2015 came in lower and the first half of 2016 has been
disappointing
7

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
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.
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.
Corporation tax has also been cut sharply since 2010,
with the main rate dropping from 28% to a proposed
17%
11

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.
These big giveaways were expected to cost roughly
£32bn this year and £41bn by the end of the
parliament
13

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.
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.
He would also remain on course to deliver an overall
budget surplus in this parliament, as targeted by his
predecessor
16

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.
A combination of economic factors and politics has fed
into a longer-term change in the composition of UK
receipts
18

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.
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.
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.
Revenues have become more concentrated post-crisis
partly because an increasing share of the population
has paid no income tax
22

23.
With this fall coming even as the share of the
population in work has returned to its pre-crisis levels
23

24.
In part, this shift is associated with a change in the
type of employment held by workers since the crisis
24

25.
But the declining tax base is also a product of increases
in the tax threshold that have rapidly outpaced
earnings growth
25

26.
While the overall share of the population paying
income tax has fallen, the share paying higher rate and
above has increased
26

27.
The result is that an increasing share of income tax
comes from a relatively small group of higher earners
1999-00
27

28.
The result is that an increasing share of income tax
comes from a relatively small group of higher earners
2007-08
28

29.
The result is that an increasing share of income tax
comes from a relatively small group of higher earners
2015-16
29

30.
Which brings (upside and downside) risks due to the
volatility of top incomes across the economic cycle
30

31.
31
CHANGING TAX
The new Chancellor has the opportunity to
reprioritise tax and spending in the
Autumn Statement

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.
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.
ChangingTax
Pressing reset on the UK’s tax base
Matt Whittaker
November 2016
34
@MattWhittakerRF @resfoundation