With less than two months until the budget, what should we worry about? A capital gains tax rise? A cut to the inheritance tax allowance? Or a change to pension tax relief?
Whatever the pros and cons of the next budget Rachel Reeves looks destined to make the mistake of so many chancellors before her — she is unlikely to be bold enough.
What you can virtually guarantee is that we will just have more tinkering; more playing with rates and allowances; squeeze a little more cash from here, hand out an even lower amount there. Then we’ll get more rules to stop the avoidance of tax from the unintended consequences of policy changes from a previous budget. It is tinkering on tinkering.
Our tax system is one of the most complicated in the world. There are more than 1,180 different tax reliefs and numerous cliff edges such as the threshold for tax-free childcare and the VAT threshold for small businesses. It’s also riddled with anomalies and loopholes.
It doesn’t help that we have about two fiscal events each year — sometimes more — and have had no less than five chancellors in the past four years (one of whom lasted for 38 days). They have all tried to put their own stamp on fiscal policy.
A bold chancellor would rip it all up and start from scratch. That would give them the chance to design a tax system built on principles.
• It would be wrong to put up capital gains tax
For a start, we need a tax system that is family friendly. Ours has focused almost exclusively on individual incomes and paid little attention to household or family finances. We have a situation where two families with exactly the same household income pay vastly different amounts of tax, and so have wildly different levels of disposable income. This has been further exacerbated by the fact that the provision of child benefit, tax-free childcare and 30 hours of free childcare are all based on individual income.
Politicians often like to highlight the benefit of the marriage tax allowance, but it’s worth a pitiful £252 a year.
Then you want to encourage hard work. The 60 per cent plus marginal tax you face if you earn between £100,000 and £125,140 is beyond punitive. It doesn’t make sense that these workers pay much more than those on higher incomes. It discourages them from taking on extra work and pushes them to find ways to lower their taxable income or, if they are self-employed, even stop working for the rest of the year. In what other parts of the world would someone not be able to afford a payrise because the tax system will penalise them?
We also need to encourage property buying. I would make big, sweeping changes to land tax. Stamp duty has created a barrier to mobility right across the board, from first-time buyers to second-steppers to downsizers. It needs to be scrapped.
And the council tax system, which wasn’t fit for purpose when it was set up in the 1990s, needs a dramatic overhaul. You can now have someone living in a modest three-bedroom semi in Manchester paying much more a month than someone in a million-pound penthouse in Kensington. Or you can get neighbours in identical houses in different council tax bands.
We should have one tax, based on the value of the land and paid on an annual basis. This would mean that you could move home without having to pay tax at all.
We need a tax system that is fit to last for a lifetime, not one being tweaked to oblivion. Sometimes starting from scratch is the best solution.