Fuel duty should be replaced, says IFS tax review

 
Mirrlees Review books The Mirrlees Review was conducted over five years and produced two volumes

Replacement of fuel duty with a congestion charge is among a number of measures suggested in a blueprint for the tax system by a leading think tank.

The Mirrlees Review, by the Institute for Fiscal Studies, claimed that the UK tax system was inefficient and complex.

In a blueprint for long-term reform, it said an overhaul of the system would benefit the economy by tens of billions of pounds and create thousands of jobs.

Ideas included abolishing property stamp duty and expanding VAT.

"[The tax system] could raise as much revenue and achieve as much redistribution as it currently does in far less costly ways," said Nobel Prize-winning economist Sir James Mirrlees, who led the review.

"There is no getting away from the political difficulty associated with some of the proposed changes. But there is also no getting away from the enduring costs of failure to reform."

A spokeswoman for the Treasury said: "The government has embarked on a programme of ambitious reforms of the tax system to address the instability of recent years.

"These are based on clear principles to support growth, reward work, reduce complexity and increase fairness."

Direction

The review, which took five years to complete, said in its final report that the government took about £4 in every £10 earned in the economy in taxation.

But the authors claimed that, despite the huge sums involved, there was no clear direction for tax policy.

Woman studying a council tax bill Council tax is "unnecessarily regressive", the review suggests

They suggested that taxation of housing was a "mess", income tax and National Insurance were pointlessly separate, and environmental taxes were "arbitrary and inconsistent".

One of the most striking - and shorter term - recommendations was to bring in a comprehensive system of congestion charging to replace duty on petrol and diesel.

It said that greater fuel efficiency and the advance of electric cars would reduce the income for the government anyway from this form of taxation.

Other recommendations included:

  • Linking council tax to up-to-date values of homes, rather than a 1991 valuation, and abolishing stamp duty
  • Merging income tax and National Insurance. Confusion of the system was clear when many basic rate taxpayers paid more in National Insurance contributions than income tax
  • Extending VAT to nearly all spending. The current system sees means consumers are not charged VAT on items such as food and children's clothing
  • Making all savings tax free if they do not involve any risk, to avoid saving being discouraged by the tax system
  • Changing corporation tax in order for businesses to avoid an excess reliance on debt

One additional recommendation that could be made a priority, according to the review's authors, was changing the tax system to provide more incentives for 55 to 70-year-olds and parents of school age children to go to work.

For example, this could include making child tax credits more generous for families whose youngest child was under five, but less generous after they reached five years old.

For the older generation, one idea would be to reduce the age at which a more generous tax-free personal allowance was available from 65 to 55, but to raise the eligibility age for Pension Credit to 70.

The review said that such changes could put 200,000 more people in work and increase total earnings by nearly £3bn.

'Tyranny'

The review did not comment on the fairness of the system, or the level at which tax was levied, but on the way the UK system operated.

Paul Johnson, director of the Institute for Fiscal Studies, said that the "tyranny of the status quo" meant that there would always be some losers if a tax system was altered.

Start Quote

I expect the political will to engage in this level of radicalism is not quite there”

End Quote Francesca Lagerberg Grant Thornton

But he argued that failure to come up with long-term changes was costing the country.

"Successive governments have failed to set out a coherent strategy for tax. As a result the current set of taxes is complex and often incoherent and they impose a much greater cost on the economy than need be," he said.

He accepted that many of the recommended changes would be difficult politically, and he said the blueprint was aimed at providing direction for the tax system over the next 10 to 20 years.

Regarding current debate about the 50p top rate of income tax, he said it was difficult to tell at present whether this was bringing in more income for the government.

Reacting to the Mirrlees Review, Francesca Lagerberg, from Grant Thornton, said: "If you were starting today, without any of the baggage from the patchwork quilt of the tax system, a lot of what they are saying is very sensible.

"The problem is we are not starting with a clean sheet. To get these issues agreed by politicians and implemented is a massive change that could take a long, long time.

"In the current economic climate, I expect the political will to engage in this level of radicalism is not quite there."

The Treasury said that it would need to look carefully at any costing of tax reforms, which had not been addressed in the Mirrlees Review.

It added that some of the reforms suggested in the review were already in the pipeline, such as simplification of the benefits system and integrating the operation of National Insurance and income tax.

It had also formed the Office of Tax Simplification, and was reforming the state pension.

Meanwhile, proposals would be published in the autumn that would make the personal tax system more transparent.

 

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  • rate this
    +1

    Comment number 114.

    Can someone explain how linking council tax to todays house prices will be fair? Yes my property has gone up in price since i bought it in 1999 however my salary hasn't gone up at the same rate (mores the pity). In fact due to public sector cuts i most probably will have a pay cut when my depatment is re-structured. I find it a struuggle already to find this tax.

  • rate this
    -1

    Comment number 113.

    Fuel duty is incredibly efficient. That is why it has started to subsidise things like lower taxes for high earners, where the Chancellor and the tax man have to work hard to get the money in. Fuel Duty creates few jobs, a Congestion Charge would probably create more as it is a less efficient tax.

    But do we want more 'drain' jobs, like Traffic Wardens in our economy?

  • rate this
    -1

    Comment number 112.

    re #93
    People who do not own cars still pay transport taxes including Fuel Duty and the Fuel Duty Escalator. The cost of your food also pays transport taxes. Your Council Tax is higher because fuel duties have increased.

    Rail fares are higher than need be because cost of road travel has been constantly driven upwards by taxation, thereby removing an element of competition between road & rail.

  • rate this
    -1

    Comment number 111.

    re #43
    Problem is that where the vehicle is driven, for example by Local Authority worker, you will pay for that Congestion Charge in your Council Tax bill.

    Think of the CC and Income Tax bill just for the emergency services?

  • rate this
    0

    Comment number 110.

    Never-mind, road-user fleecing. Politicians get their travel cut price, we all know this. What would be interesting would be to find out if politicians receive concessions on their family household energy bills. Their pretence at Shock Shock-Horror-Horror-Shock,Shock, is patronising and no-one believes their relentless smirking that their constituents are suffering by growing energy prices ?

  • rate this
    0

    Comment number 109.

    A universal congestion charge will be as bad as Fuel Duty. Everyone pays transport taxes, whether they use transport or not. Even a little old lady, who never leaves her house, pays extra in taxes (Council Tax) and in goods & services because of transport taxes. A congestion charge would be just the same.

    It is the biggest drag of all on our economy and is only there to subsidise low income tax

  • rate this
    +1

    Comment number 108.

    The one efficient Tax in the UK is Road Fuel Tax, colleced at the refinery Gate, it also bears most heavily on he heavy user, Road pricing would be at best inefficient and certainly expensive to operate. VAT is underused as both a collector of Tax and also as a regulator.
    Better to reduce the need for Taxation by making private enterprise efficient with public money.

  • rate this
    +1

    Comment number 107.

    Abolish ALL the current direct, stealth and indirect taxes, reliefs, allowances.
    Replace them all with just one flat rate tax % – no tax free personal allowance and no maximum.
    It’s fair – If I earn twice as much as you I pay twice as much tax.
    It's simple for everyone to understand.
    It's very low cost to administer.
    Make it hard to avoid by auto deducting at source of income.

  • rate this
    0

    Comment number 106.

    Surely not. How else is our glorious government (not) going to counterbalance their fiscal incompetence ?
    It's ours to pay and theirs to waste - is it not ?

  • rate this
    +1

    Comment number 105.

    Would someone please explain how putting VAT on food would make the tax system fairer? A poor person spends more of their income on necessities than a wealthy person does; it's not rockey science.

  • rate this
    +1

    Comment number 104.

    #103: US system of stripping citizenship off people living abroad who do not pay US tax would be illegal under EU law, shame I rather like the idea. Of course would not help if Ms Green gave back her passport and took Monaco citizenship.

    As for witholding tax, it would just be too easy to get around and encourage companies to move head office offshore. Might also be a problem under EU law

  • rate this
    -3

    Comment number 103.

    Fuel duty should stay as it is. It is a fairly accurate reflection of road use, heavy vehicles which damage the road surface paying more, as should those knocking up more mileage than others.

    Congestion is here to stay, so we either have to put up with it, or change our driving habits. Just look at the number of cars with no more than one occupant inside. Motorcyclists should pay no duty.

  • rate this
    +1

    Comment number 102.

    #83 It is not tax avoidance, UK does not charge tax on dividends paid by UK companies to foreigners

    then it should adopt US policy which is to charge a withholding tax. Maybe they should also adopt the US practise of taxing all its citizens on worldwide income irrespective of where it was earned.

  • rate this
    -1

    Comment number 101.

    A tax on processed foods would be a good idea and benefit the health of the nation in one go. Congestion charging would be nightmare to administer.

  • rate this
    +2

    Comment number 100.

    The simplest solution:
    Single flat rate tax on all income, single flat rate benefit to everyone. All are better off working, and its fair.
    Corporation tax (at the flat rate) on ALL business transacted in UK.
    Flat polution tax on all CO2 emissions (calc to per gallon of petrol/diesel, unit gas etc.) if you must.
    No other tax at all - no tv licence, no rubbish charge, local authority tax...

  • rate this
    0

    Comment number 99.

    So on the one hand we have UNICEF encoiuraging us to spend more time with our families & on the other the IFS encouraging tax breaks to get single mothers to work more. Perhaps, instead of trying to sell us their policies, politicians might consult us about what sort of a society/what sort of lives we want.

  • rate this
    +1

    Comment number 98.

    The trouble is that any tax based on usage would be far more expensive to meter and collect than a flat rate tax. Unless or until motorists stage an organised revolt at the taxes they are charged (or persuade the AA or RAC - who should be organising such campaigns, but are too busy selling insurance, holidays and you name it!) then government will continue to divide and rule motorists.

  • rate this
    +1

    Comment number 97.

    Why all on fuel? Well the more fuel you burn the more polution - a more direct link than G Browns idiotic messing with CO2 bands. The more you travel the more fuel you use - so taxing fuel encounrages you to consider alternatives. Car sharing etc. is more attractive, as is having efficient commute car and a larger weekend family car in parallel. TAX FUEL nothing else.
    5 mins per 500 char post :(

  • rate this
    +1

    Comment number 96.

    These people are insane, while the tax system needs sorting they have failed to come up with a single sensible idea.
    Road chargign relies on tracking everyones daily lives - its intrusive. Worst, it fails to deal with the difference between a 1 mile per gallon monster and a fuel efficient run about. ALL motoring tax should be on fuel. NO roadfund, no insurance tax... ALL on fuel

  • rate this
    0

    Comment number 95.

    #83 It is not tax avoidance, UK does not charge tax on dividends paid by UK companies to foreigners

    However, if you have a problem with that then what exactly are you proposing, that women should not be allowed to own shares (at least for tax purposes) or that all foreigners should pay tax in UK on dividends from UK companies - which should rapidly ensure that companies move offshore

 

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