‘Twelve pro-growth, pro-fairness tax proposals to fill the budget black hole’

At the Budget Rachel Reeves needs to increase taxes in a way that supports growth, improves fairness and raises lots of money. For months now commentators, think tanks and Treasury spinners have been floating ideas. Some are all but certain to happen, others are very remote possibilities. 

But the key choice for the chancellor is whether to use the Budget to kick-off serious changes to the tax system or merely pull existing fiscal levers. Here are twelve distinctly Labour proposals that add up to major reform. Together they are pro-growth, pro-fairness and would bring in tens of billions.

1. Freeze all income tax and national insurance thresholds until the end of this parliament. This is the most plausible way to raise significant sums from income tax and national insurance without breaching Labour’s manifesto. Without this political restriction, the same amount could be raised in a more progressive way by increasing tax rates while pushing up tax thresholds. If that were to happen Reeves should raise income tax not reverse Jeremy Hunt’s cuts to National Insurance, so it is not just workers who pay.

2. Eliminate very high marginal income tax rates in a fiscally neutral reform. Arbitrary tax rules that suppress earnings and distort economic choices for high earners should be scrapped, with the cost met by lowering the thresholds and increasing the rates of the top tax bands. Policies that should be removed are the withdrawal of childcare support and the tapering of the personal allowance after £100,000 of income; and the tapering of child benefit after £60,000 of income. As a fiscally-neutral, pro-growth package, this could be argued to be within the spirit of Labour’s manifesto.

READ MORE: Labour MPs call for Chancellor to hike taxes for greater spending – poll

3. Introduce a high-income ‘tax-swap’. Add 2p to the higher and additional rates of income tax and scrap the 2p additional rate of employee national insurance that is currently paid on earnings over £50,000. This would lead to different forms of high income being treated the same and would increase the amount the wealthy pay on pensions, investments, rents and self-employment.

4. Introduce a basic-rate ‘tax-swap’ too. Also add 2p to the basic rate of income tax and reduce employee national insurance from 8p to 6p, an idea recently proposed by the Resolution Foundation. Employees would not pay more, but some will definitely view this as a breach of Labour’s manifesto since it hits middle income pensioners and the self-employed. It could be presented as a transfer of the NHS component of National Insurance over to income tax to help pay for the ageing population.

5. Levy National Insurance on pensioners. The first step here is to levy employee and self-employed National Insurance on the earnings of people over State Pension Age. There is no clear reason to have an upper age-limit on workers’ NICs and the reform can also be presented as another solution to the costs of old age. A much more controversial step would be to apply an equivalent to National Insurance on private pension. This makes fiscal sense because NICs are currently charged on neither pension contributions nor private pensions. However, it is probably a political non-starter.

6. Replace the small business VAT cliff-edge with a sliding-scale. Businesses have to register for VAT when their sales reach £90,000 which leads many to suppress their income to stay below the threshold. This is a barrier to economic growth and tax revenues. The threshold for registration should be gradually reduced to, say, £50,000. But there should also be a tapered cash-back arrangement so HMRC returns some of the VAT that firms pay up to around £100,000 of income.

7. Introduce flat-rate tax relief on pension contributions. Today upper rate taxpayers get higher tax relief per pound of pension contribution than basic-rate taxpayers. They typically also receive far more tax relief during their working life than they will later pay in tax on their private pension. A progressive reform that levelled the playing-field could raise tens of billions without causing economic harm. Income tax and employee NICs would be charged on all employee and employer pension contributions – and pension funds would then receive a flat-rate top-up from the government regardless of someone’s tax band.

8. Reduce the pension tax-free lump sum. This tax-free perk is another big reason why large pensions today go under-taxed. The chancellor should reduce today’s threshold for tax-free lump sums of £268,000 to around £100,000 which is still a very large amount for most people. A transition period of a few years might be required to help protect people with imminent retirement plans.

9. Convert stamp duty into an annual levy. Stamp duty is restricting property transactions and therefore inhibiting growth. The current 2p rate probably causes little harm so could be retained for homes of all prices. But the 5p, 10p and 12p rates on different portions of a property’s value should be replaced by an annual tax worth a tenth of the amount, using the same schedule of rates and thresholds. People could opt to have their annual payment deferred, to be paid when the home is sold – and, as a transitional measure, anyone who had paid stamp duty in the last 10 years should receive an automatic discount.

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10. Introduce an England-wide surcharge on the top two bands of council tax. This option was discussed recently by the IFS who examined options including doubling council tax for bands G and H. This would hit just over 1 million expensive homes. The extra revenue should be a nationally-mandated precept that councils would pay to central government, otherwise the reform would distort local government finance. This policy and the stamp duty reform will together make it much easier to introduce a fully progressive property tax in the future.

11. Create a lifetime cap on ISA saving. The Treasury is currently sparing with the financial services industry with respect to annual ISA caps. The chancellor is seeking to limit how much can be saved in cash to promote investment in equities, especially in the UK. However, from the perspective of progressive revenue-raising, it is more important to cap total ISA saving, so that the system rewards moderate savers but not ISA millionaires. A lifetime cap of £100,000 could be applied to either net contributions or maximum holdings.

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12. Scrap almost all VAT reliefs but provide flat-rate compensation. There is basically no chance of this happening, but it should. VAT reliefs on products such as food, children’s clothes, energy, transport, publications and new homes benefit the wealthy much more than the poor because the rich consume more goods and services. These exemptions cause huge complexity, distort consumption patterns and restrict tax revenues. Over five years the Treasury should scrap almost all VAT reliefs and compensate people by making flat-rate changes to other taxes and benefits. The idea would be to give back an amount broadly equivalent to the extra VAT that lower-income households would pay via increases to universal credit, the state pension, child benefit and income tax/national insurance allowances. Above-average spenders would end up worse off and where the government wished to reduce specific costs, it could create direct subsidies.

A longer version of this article with policy costings is published at Andrew Harrop’s blog Cradle to Grave.

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