Today I attended a presentation of the findings of the Mirrlees Review of the UK tax system.  This represents the climax of a very impressive piece of work from the Institute for Fiscal Studies, who have reprised their earlier (1978) work with Nobel Prize winner James Meade in producing a comprehensive view of what an ideal tax system would look like if you could start from scratch.

Led by Sir James Mirrlees, another Cambridge-resident Nobel Prize winner, the review started with the following three axioms:

1. You must consider the tax system as a whole.  This means that you should look at the overall tax system in its entirety instead of individual components.  It's acceptable for certain bits to be regressive so long as the overall system is, on balance, progressive.
2. You should seek neutrality in the tax system.  But deviations from this are acceptable, so long as the impact on complexity is understood.
3. Achieve progressivity as efficiently as possible.  This means the interaction between benefits, income and taxation must be considered, including the impact on behaviour of the tax and benefits systems.

These are fairly uncontroversial.  And they have identified a number of significant flaws in the current UK tax system:

• Income tax and NI interact in bizarre and undesirable ways.
• There are huge distortions as a result of the different treatment of earned income and corporate profits/dividend income.
• The tax system often ends up taxing the normal return.
• The corporation tax system favours debt over equity.
• There are a whole load of different taxes that apply to carbon, whereas classical economic theory suggests that there should be just one.
• The tax system doesn't address the externalities of road congestion properly.
• The zero-rating of certain goods in the VAT system is an inefficient way to help the poor.
• The interaction between tax and benefits withdrawal is harmful and distorting and has unacceptably high marginal rates.

And the IFS commissioned teams of academics to go away and research key areas for the report.  The key findings, presented today, were as follows:

• Merge Income Tax and National Insurance.  National Insurance is no longer an insurance policy to provide an income in retirement; it's just another tax on income.  Therefore they propose merging it into income tax in order to remove a factor that generates fluctuating marginal rates.
• Stop tapering personal allowances.  Personal allowances are tapered on income above £100,000 and the age-related personal allowance is also tapered.  Tapering creates enormous problems with high marginal rates - the withdrawal above £100,000 creates a marginal rate of 60%.
• A single, integrated benefit should be created.  Currently there are lots of overlapping benefits, which tend to get withdrawn via means-testing fairly quickly, creating high marginal rates of tax/benefit withdrawal.
• There should be special incentives for those with school-age children and for workers aged 55-70.  This is because they are most sensitive to incentives in the decision whether to work.
• The zero-rated and reduced VAT rates should be abolished.  It's madness to give a lower tax rate on domestic energy supply.  And other incentives could be provided in better ways than through the VAT system.
• VAT or some equivalent charge should be levied on financial services.  They are currently VAT-exempt, which doesn't really make sense.
• Replace Council Tax and Stamp Duty with a single tax that is proportional to property values.  This removes a great deal of stickiness in the tax system and also should help with progressivity.
• Establish a consistent approach to carbon taxation.  This is a key theme of the Stern review too.
• Introduce a system of congestion charging.  Road congestion is addressed through fuel duty which, as more cars become more efficient and people switch to electric cars, is becoming an increasingly poor proxy for road congestion.
• Don't tax the normal return to savings.
• Don't provide such large incentives for employers to contribute to pension schemes.  Employers don't pay employers' National Insurance on contributions to their employees' pensions, which perhaps explains why employers contribute more than employees.
• The tax free lump sum benefit in pension schemes should be abolished in favour of a more sensible long-term savings incentive.
• A Rate of Return Allowance should be introduced for substantial holdings of risky assets, such as equities.  But they recommend that the equity ISA savings incentive should be retained.
• The tax rates on income and capital gains should be equalised.
• There should be a more effective mechanism for dealing with wealth transfers.  And, in particular, they believe there is a place for some form of Inheritance Tax.

Each of these recommendations is supported by pages and pages of supporting arguments and evidence.  The findings document runs to 20 chapters, and will be printed in the New Year.  But if you can't wait, you can download draft versions of each of the chapters here.

The presentations from today's session can be downloaded here.

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Filed under: Current issues, Taxation with tags corporation tax, council tax, income tax, institute for fiscal studies, meade review, mirrlees review, national insurance, pensions, savings, vat