Raising the NI threshold would have cross-party support

In Wednesday’s Budget we saw the personal allowance threshold rise again; starting April 2016, earnings up to £10,800 will be tax-exempt. The coalition knows that raising the personal allowance is a politically popular idea (not to mention good public policy). It’s great to see them inch slightly closer to taking minimum wage earners out of income tax all together.

But given how in-tune they are with the tax relief this policy provides to low earners, it’s hard to make sense of their decision to ignore the National Insurance threshold, which currently sits well below the personal allowance threshold at £7,956/year. 

Especially when it would be politically popular to address it.

A pre-Budget poll from YouGov asked Conservative, Labour, Lib Dem and UKIP respondents which policies they would support or oppose if the Chancellor were to announce them on Wednesday. The policy that received the most support (83%) was raising the personal allowance threshold to £11,000, followed by “raising the National Insurance threshold, so it is no longer paid by the lowest earners”, which received 71% support.

It gets even more interesting if you break it down by party. On NI, both Conservatives and Lib Dems supported the policy with a 75% majority, followed closely by Labour at 72%. UKIP brought the average down slightly, but with a significant majority still favouring the policy at 68%.

Getting the poor out of tax has strong cross-party support and the Chancellor should, in theory, be able to implement changes to the NI threshold without extreme push back from any opposition parties. Yes, the coalition should be credited for their reforms to the personal allowance, but now is hardly the time to go soft on a bad tax that continues to hit the poor hard.

One tax hike I'll be hoping for in the Budget (and some cuts as well)

Back home in Ireland, it’s said that asking for directions will often get you the reply, “I wouldn’t start from here.” We might say the same thing about the UK’s tax code. Nobody drawing up a tax system for the country would create anything like what we have right now, and when it comes to reform – well, I wouldn’t start from here. One example, which I talked about on the Today Programme this morning, is VAT. VAT is usually considered to be one of the least bad taxes around: in theory, it doesn’t discourage production, it isn’t very regressive, and it doesn’t distort the economy.

I say “in theory” because in practice the UK’s VAT system is a mess. It is riddled with exemptions (I am including zero-rated and reduced-rated goods in this) that distort people’s spending, which means that resources are being wasted, because people are buying relatively more of the untaxed goods and less of the taxed ones than they would be if the playing field was level.

The usual argument for these exemptions is that they are needed to reduce the burden on the poor. This is a powerful argument but it is wrong.

Many of the exempted items are unlikely to benefit the poor anyway – financial services, the construction of new dwellings, domestic passenger transport – but even for things like children’s clothes and food the argument is wrong. Although poor people spend a greater fraction of their budgets on exempted items like these, total spending on these goods rises with income, so most of the forgone revenue is actually from the rich.

The extra money raised could easily offset the extra cost to the poor by reducing income taxes on them (including national insurance contributions) or by raising the Universal Credit payment level. We could actually offset the extra cost to almost everyone, but except for people on low pay I think there are better taxes we could cut with the money left over.

The IFS estimated in 2010 that scrapping all VAT exemptions would raise an extra £26-28bn, based on 2010-11 numbers. Conservatively, rounding that up to £30bn to account for the larger economy, and spending half on boosting the incomes of the poor, we have £15bn left to play with. We’ve suggested scrapping capital gains tax to boost investment and using the rest to reduce the deficit.

In simplifying VAT we can make one important tax much less destructive without hurting the poor and use the money left over to cut taxes that are even worse.

Politically, this might not deliver good headlines, but if it was done at the start of the next Parliament the boost to people’s living standards by the next election could, improbably, make raising taxes on food and children’s clothes a real winner.

We might not want to start from here to get our sensible tax system, but this is one reform that could be a good step in the right direction.

ASI's Budget 2015 wishlist: A tax code that actually makes sense

Nobody designing the UK’s tax code from scratch would come up with one like the system we have now. Our taxes are complicated and inefficient and divert capital away from productive investments that would boost economic growth. This year, we’re hoping for a Budget that reforms the tax code in line with the best economics out there, reforming the worst taxes and cutting the tax burden on investment and the working poor: VAT: broaden the base and use the money to help the poor

The huge number of exemptions to VAT make the tax so inefficient that if we raised the rate to 20% on every good we could compensate every household and still have a few billion pounds left over. If, instead, we raised every good to the 20% flat rate, but compensated only households earning less than median income, we'd have billions left over to reduce the deficit. The money raised should be given back to people on low pay through tax credits and to create a higher national insurance contributions threshold, which would increase the incentive to work on the other end.

Capital Gains Tax: abolish it outright to boost growth

Capital Gains Tax (CGT) is an extremely inefficient tax on capital that reduces overall investment and raises just £5bn annually. CGT reduces investment, 'locks-in' capital to less productive investments and can be avoided by not investing in assets that will rise in price, so it is distortionary and ends up directing investment away from riskier assets like start-up business debt. Scrapping CGT would not cost a lot (and could be paid for with the money left over from the VAT broadening, above), and would boost investment and growth, boosting wages across the board.

Business rates & council tax: revalue with a view to eventually merge

Business rates & council tax are in theory some of the least bad taxes on the books. As long as the values they are levied on are kept up-to-date, they reduce economic activity much less than most taxes. But in the modern world house prices and land prices move rapidly and not uniformly. The North is currently being hammered—paying business rates far higher than their property deserves—the South is winning out with unfairly cheap payments. Council tax is even worse: the band system is out-of-date and should be replaced with a fluid penny in the pound system like rates, while the revaluation long postponed from 1993 should be done now and then kept constantly up-to-date. If Zoopla can get good estimates of property values then surely HMT can too. Eventually the two systems should be merged at the same rate, so that housing and business both go where they are most in demand.

For further comments or to arrange an interview, contact Kate Andrews, Head of Communications, at kate@old.adamsmith.org | 07584 778207.

Osborne scraps the worst tax in Britain – the ASI's reaction to the Autumn Statement

Here are our comments on today's Autumn Statement: Stamp duty:

Head of Research at the Adam Smith Institute, Ben Southwood, said:

The old stamp duty slab system was one of the worst taxes Britain had, and we welcome the Chancellor's radicalism in abolishing it, rather than simply tinkering around the edges.

According to the best economic research, raising £1 through stamp duty imposes £2-£5 of cost on the economy. Though it will still, as a transactions tax, cost the economy heavily, the reform will reduce the economic cost substantially. This is a tax cut for the squeezed middle that will make a big difference to a lot of people's lives. Politically, it could be a game-changer.

Business rates:

Deputy Director of the Adam Smith Institute, Sam Bowman, said:

A cap on business rate rises is welcome but the rates system itself needs more fundamental reform. The longer rates take to be revalued, the more distortionary the system is, penalising firms located in areas that have done badly since the last valuation. The longer the gap between rates revaluations, the greater the penalty for businesses in poorer areas and the effective subsidy for businesses in richer ones. Ideally the government should move towards a system of constantly rolling rates revaluations. If Zoopla can judge land values accurately on a rolling basis, so can HM Treasury.

Road infrastructure:

Head of Research at the Adam Smith Institute, Ben Southwood, said:

Infrastructure investment, especially into congested roads, is bound to pass a cost-benefit analysis. The problem is that we had to wait this long. If private firms could build roads, funded by tolls, then we'd likely have all of these roads already. As well as providing funds for investment, and making sure the investment goes to the most in-demand areas, pricing roads also means they get used more efficiently.

Pensions: 55% tax, tax-free inherited ISA

Director of the Adam Smith Institute, Dr Eamonn Butler, said:

The Chancellor is right to kill off the iniquitous 55% tax on inherited pensions, as well as the tax on inherited ISAs. If people have saved for their retirement but die before exhausting their nest-egg, it should go straight to their dependents, not to the Chancellor.

NHS Spending:

Communications Manager at the Adam Smith Institute, Kate Andrews, said:

The Conservatives, along with the opposition parties, are playing politics with the NHS budget. Everyone is vying to be seen as the 'party of the NHS' but no one is willing to have a serious conversation about the reforms that could make the NHS financially viable for the next ten years, let alone for future generations; like charging small fees for non-emergency visits.

It's been estimated that the NHS could fall into a budget crisis as early as 2015, which could result in cuts to core staff, longer patient waiting lists, and a deterioration in the quality of health care. While the extra £2 billion per year proposed by Osborne today will offsets short-term worries, it merely kicks the can down the road for a little while longer. Serious proposals to address the spending and demand that comes with free care ‘at the point of use’ could not come soon enough.

Personal Allowance rise:

Deputy Director of the Adam Smith Institute, Sam Bowman, said:

The Adam Smith Institute has called for the personal allowance to be raised to the full-time minimum wage rate for over a decade and it is welcome to see the government move in this direction. But the National Insurance Contributions threshold has been left untouched, which costs full-time minimum wage workers £667.68 a year. To really help low-income workers the Chancellor should make raising the National Insurance threshold one of his top priorities.

Capital gains tax on property for foreigners:

Head of Research at the Adam Smith Institute, Ben Southwood, said:

Capital gains taxes are some of the worst ones on the statute book, making society poorer by reducing the efficiency of investment and its total amount, but if we have to have them then everyone should pay them.

This is not just because of fairness, but because it causes massive distortions when different groups face different tax rates. In this case it's likely to both lead to excessive foreign ownership of property—both by favouring foreigners over natives in property taxes and by favouring property over other assets for foreigners.

Masters degree loans:

Director of The Entrepreneurs Network, Philip Salter, said:

By extending Entrepreneurs’ Relief and R&D tax credits George Osborne is backing Britain’s entrepreneurs. However, the government’s intervention in the postgraduate student loan market risks crowding out private sector solutions. Banks already provide Professional and Career Development Loans, and entrepreneurial companies like Future Finance, StudentFunder and Prodigy Finance are responding to the demand for loans for postgraduate studies. We are on the verge of the equivalent of the funding revolution we are seeing in SME finance but this intervention risks stymieing it.

The deficit:

Deputy Director of the Adam Smith Institute, Sam Bowman, said:

The deficit is still enormous and much higher than anybody expected at the beginning of this Parliament. We are borrowing £100bn this year, both because planned cuts to the welfare budget have not taken place and because the growth we have had has not translated into much extra tax revenue. But as high as this is, the Chancellor’s plans to reduce the deficit still seem credible – financial markets are lending to the country at unprecedentedly cheap levels and once productivity eventually does start to recover, things should begin to look considerably better.

Notes to editors:

For further comments or to arrange an interview, contact Kate Andrews, Communications Manager, at kate@old.adamsmith.org / 07584 778207.

The Adam Smith Institute is an independent libertarian think tank based in London. It advocates classically liberal public policies to create a richer, freer world.

Seven things we'd like to see in Budget 2014 (but probably won't)

Here are seven things we'd like to see at this year's budget:

1. Personal allowance and employee National Insurance thresholds should be merged and set at the NMW level (approx. £13,000/year after the NMW is raised to £6.50/hour). The government should legislate to keep the tax & NI thresholds at at least at the NMW level. It is crucial that the National Insurance contributions threshold be raised as well as the income tax threshold.

2. The corporation tax cut planned for 2015 should be brought forward by a year (to 20% this year), with a commitment reduce it further by 2.5% per annum for the next three years to 12.5%. In the long-run it should be abolished altogether as it is a stealth tax on income (workers’ wages bear approximately 60% of the tax) and a distortionary tax on capital.

3. The Chancellor should go forward with plans to merge Income Tax and National Insurance. Employers’ National Insurance Contributions should be included on workers’ wage slips to highlight that this is a stealth tax on wages.

4. Help to Buy should be wound down ahead of schedule to reduce house prices in London and the South East. To create jobs and encourage construction the Chancellor should endorse radical planning reform that would allow more houses to be built.

5. Subsidies (“financial relief”) to energy intensive industries should be ended with the money saved paying for a broad reduction in green energy taxes to reduce consumers’ energy bills.

6. The ring-fence of NHS spending should be abolished. If savings can be made in the education, policing and welfare budgets, they can be made in the healthcare budget as well.

7. The Bank of England’s mandate should be revised, with the Bank instructed to target the level of nominal spending (nominal GDP) in the economy along a predetermined trend. This would reduce inflation in boom periods and prevent deep recessions by stabilising aggregate demand.

Budget 2013: The good, the bad and the ugly

It’s not saying much, but this was George Osborne’s best budget yet. These tax cuts are long overdue, though they are not significant enough to solve Britain’s growth problem. Cutting taxes for businesses will stimulate investment and job creation, and reducing the tax burden for low- and middle-income earners will make life easier for them.

But government spending is still rising by £20bn this year. The government’s plans to meddle in the housing market are staggeringly misjudged, and we risk repeating exactly the same policy mistake that led to the US subprime mortgage bubble. And we’re still going to be borrowing £108bn this year – that’s £295m a day, every day, with no end in sight.

The Good

Personal allowance raised to £10,000 by 2014. Income taxes are smothering workers. The taxman takes more than 30p out of every pound earned by low- and middle-income workers above the personal allowance. Raising the personal allowance to £10,000 ahead of schedule is a significant step to reducing the tax burden for low- and middle-income workers, and creates the tantalising prospect of the personal allowance being pegged to the minimum wage rate in 2015.

Corporation tax to be cut to 20% by 2015. At last, an encouragingly bold tax cut for business. The corporation tax rate will be falling from 28% to 24% this April, then from 24% to 21% next year, and finally from 21% to 20% in 2015. Although this does indeed put Britain ahead of other ‘major economies’, small countries like Ireland (which has a corporation tax rate of just 12.5%) will still be able to outcompete Britain in attracting investment from multinational corporations.

Employers’ national insurance bills cut by £2,000 for every firm. Employers' NICs are a direct tax on jobs, so tax relief should allow some businesses to take on extra employees. The cut will have the most pronounced impact on micro-businesses, 450,000 of which will reportedly be taken out of tax altogether.

Beer duty to be cut by 1p, and the ‘beer duty escalator’ to be scrapped. Two weeks ago the government was pushing for minimum alcohol pricing, and now it’s cutting the price of beer. It might not be cutting duty by much, but it’s a welcome change after years of miserable, anti-poor paternalism. And scrapping the outrageous ‘beer duty escalator’ is long overdue. No Chancellor should be able to pretend that a tax hike is out of their hands.

The Bad

The Bank of England’s 2% inflation target to stay in place. Inflation targeting has failed. It creates invisible excess inflation during boom periods (by keeping prices rising by 2% when prices should be falling because of productivity gains) and cannot offset changes in velocity in bust periods, leading to secondary deflations that amplify the damage caused by the initial bust. An alternative, rules-based system (such as an NGDP target based on a futures market instead of the discretion of the Monetary Policy Committee) would be a much less harmful mandate for the Bank of England. Mark Carney had indicated that he was sympathetic to this kind of reform. By giving up the chance to rethink British monetary policy, the Chancellor has snatched defeat from the jaws of victory.

20% tax relief on childcare vouchers up to £6,000 per child from 2015. Expensive childcare is a consequence of the costly regulations, such as mandatory maximum children-to-staff ratios (3:1 for under-5s and 1:1 for infants under one year old). If the government wants to make childcare more affordable, cutting these sorts of regulations back would be a better place to start than using taxpayers’ money to pay for childcare for parents earning up to £300,000/year.

Tax avoidance and evasion measures aimed at recouping £3bn in unpaid taxes. Tax avoidance is a legal and legitimate response to the perverse incentives of a complex tax code created by politicians trying to exempt a pet project or special interest that they favour. Tax evasion, too, is a rational response to high taxes and is only possible because of the complications in our tax code. The best way to reduce evasion is to simplify the tax code, not to persecute people taking advantages of a corrupt system.

£3bn extra for new projects every year from 2015-16 until 2020, totalling £15bn. Capital spending projects are always popular with politicians who want to leave a expensive railway line, bridge or motorway as a legacy, but there is a long history of infrastructure projects doing little help their flagging economies. Barack Obama’s $800bn stimulus package, launched in 2009, focused on ‘shovel-ready’ projects and did virtually nothing, as did successive Japanese stimulus programmes in the 1990s and 2000s. Any extra money from spending cuts should be given back to the private sector through tax cuts, where it can do the most good.

…and the Ugly

Bank guarantees to underpin £130bn of new mortgage lending for three years from 2014. Apparently the Treasury has not learned the lesson of 2008: injecting taxpayer money into the housing sector will simply inflate prices, distorting price signals and stoking the housing bubble that already seems to be growing in the housing sector. Houses are expensive because supply is restricted by the planning system. Instead of throwing money at the problem and driving prices up even more, the government should have the courage to liberalize planning to allow more development, including on green belt land.

Government ministers picking winners. Fiddling with tax breaks for specific industries is a mug’s game. There is no way the government can know which industries to promote, and these projects inevitably collapse into a mess of overcomplicated grant schemes and politics-driven bailouts of failing firms. Only consumers can pick winners.

Government spending is still rising. Despite all the talk of cuts, the government will still be spending £761bn this year, nearly £20bn more than last year. By leaving healthcare alone and failing to carry out the big structural reforms needed to reduce social security spending, the government  is not matching its rhetoric on spending with the action needed. We’re still going to be borrowing £108bn this year – that’s £295m a day, every day, with no end to the borrowing in sight.