Failure by design: how we can make better tax policy to reduce inequality

The Institute for Government, Institute for Fiscal Studies (IFS) and Chartered Institute of Taxation have recently begun a new project to improve the process around budgets and tax policy making. They want government to get better at the way it creates, changes and removes taxes. This is important, not just because it would be better if government were more efficient, but also because many of the ways that tax policy-making is currently broken hurt the poorest and help the richest. This happens through the Government failing to be transparent about the effects of tax decisions, failing to properly assess the effects of existing tax reliefs, and failing to tackle property taxation.

Up until the last election every budget and autumn statement included a distributional analysis which showed how changes in tax and benefit policy affected different income groups. It showed the effects of that tax policy on inequality in a simple accessible way. This Government has stopped producing these estimates, and in doing so has reduced the transparency of the way tax policy is conducted. One of the most important questions in tax policy is who loses out from a tax. By removing the distributional analysis from the budget the Treasury have side stepped this and wilfully obscured the winners and losers from tax policy. A government should say when it makes a change to the tax system whether or not that change will reduce inequality by targeting those most able to pay, or make the system worse by increasing the tax burden on the poorest. This transparency is crucial to an informed debate.

At least in the absence of overall distributional analysis there are still other organisations like the IFS who can provide an estimate of the effects of large changes to the tax system; the situation is much worse when it comes to looking at the effects of tax reliefs.

The UK’s tax system is filled with tax reliefs which can be used to reduce individuals’ and companies’ tax bills. These tax reliefs can be used by wealthy individuals and companies who can afford to hire expensive accountants to help them pay less tax than those in a similar position but without the resources to pervert the tax system. Rather than keeping a close eye on tax reliefs to see whether anyone is abusing them, the Government doesn’t even collect data on the amount of money that each tax relief costs, or who is benefiting from them. This problem  gets worse, as despite this Government’s promise to control the number of tax reliefs, their number continues to grow. In order to make effective tax policy in future, the Government needs to have a better understanding of the effects of the existing tax system, looking at each tax relief to see how much it is costing, whether it is actually doing what it was intended to do, and if it is only acting as a way for the richest to reduce their tax bills.

Finally, another long term problem with the UK’s tax system is politicians’ persistent inability to properly operate a property taxation system. The current council tax system is based upon property values taken from April 1991, twenty five years ago. I was a year old when the last valuation of properties for tax purposes took place. Since then I’ve been through nursery, primary school, secondary school, university (undergraduate and postgraduate) and spent several years in employment whilst politicians of various parties in England have failed to update this system. Proposed revaluations have been postponed and cancelled by politicians lacking the courage to take action. Whilst political careers have come and gone, our broken council tax system has stayed the same. This problem even pre-dates the council tax system. Part of the reason that domestic rates were ditched was because they failed to keep pace with actual property prices, and this was used as a justification to bring in the poll tax. The failure of property taxes to keep pace with property prices means that they are less effective at stopping the wild gyrations of the housing market and helping to restrain prices. This is one of the reasons why many of the poorest in the UK cannot afford a roof over their head, while for many of the richest, their house earns more in a year than they do.

The UK’s system of creating tax policy is broken and this has real effects on inequality. Policymakers need to be transparent about the effects of the tax system as a whole, and the tax relief system in particular, as well as making a real effort to bring the property tax system up to date. These are not just technical issues. Tax policy design impacts people’s lives and helps shape our unequal society. It needs fixing.

Tim Stacey, Senior Policy and Research Advisor