21 May 2012 Last updated at 15:21 ET

Calls for single 30% income tax rate

 

The commission wants a rise in the amount of income people can earn that is not taxed

A single 30% rate of income tax is needed in order to boost growth in the UK, a report by lobbying groups says.

The 2020 Tax Commission's report also calls for the abolition of national insurance, and for the basic personal allowance to be raised to £10,000.

It claims that the changes would result in a tax cut of £3,400 for a two-earner household with an income of £28,000.

The Treasury said it was committed to a "simpler, fairer and fiscally sustainable tax system".

The commission is a joint project between the Taxpayers' Alliance and the Institute of Directors.

It wants a simpler tax system in the UK, but also says that further spending cuts are needed.

The commission recommends limiting taxation as a whole to a third of national income, and limiting spending to the same level, which would mean extending cuts in public expenditure to 2020.

BBC political correspondent Mike Sergeant said those spending cuts would be far beyond the cuts planned so far.

Nick Pearce, director of the IPPR think tank, said the plan was "a recipe for increased recession, increased inequality and increased government debt".

The commission cited research that it said indicated that the "optimum size of the state", in terms of maximising economic growth, was about 30-35% of GDP.

"We have got it wrong in this country where we believe that an ever-larger state is good for growth," said Allister Heath, chairman of the commission and editor of the City AM newspaper.

But Mr Pearce told the BBC that there was no link between the size of the state and economic growth.

"Countries like Denmark, Norway and Sweden have higher rates of public spending than we do [in the UK] and they achieve very high levels of employment, of growth and very good quality of life.

"The central arguments don't hold true," he said.

'Vital choice'

The commission says shifting to a single income tax rate would add £49.1bn to the national deficit in the first year, if the changes were not phased in or if spending were not cut further.

But it predicts that after 15 years the change would actually reduce overall borrowing by £35bn.

Its proposals include scrapping stamp duty, inheritance tax and air passenger duty, and cutting fuel duty by 5p.

And it would replace corporation tax and capital gains tax with a 30% tax on dividends, interest and rent.

"It is time for Britain to make a vital choice between tweaking the status quo and letting our economy continue to be crippled by complex and punitive taxes, and drastically changing course with a radical but realistic plan for a tax system fit for the 21st century," said Allister Heath.

"The 2020 Tax Commission has set out that plan and would ensure that income is taxed once at a single, much more reasonable rate. It could create the conditions to establish the UK as a global trading hub, generating renewed prosperity for all those who live and work here."

A spokesman for the Treasury said the government welcomed the report's contribution to the long-term debate on tax policy.

"It contains some radical suggestions and will stimulate useful debate. The government is committed to a simpler, fairer and fiscally sustainable tax system and supports the case for reducing headline rates of tax to support economic growth," the spokesperson said.

"We are already taking action in a number of the areas identified in the report, for example, making progress towards increasing the personal allowance to £10,000 and further reducing corporate taxes in Budget 2012."

The personal allowance - the amount of income you can receive without having to pay tax on it - is £8,105 for the 2012-13 tax year, and will rise to £9,205 from April 2013.

But BBC political correspondent Mike Sergeant pointed out that while the coalition says it is working to simplify taxes, most of the ideas in this report are not even being considered by ministers, he added.

And although it wants to reduce spending, its doesn't go as far as this commission is suggesting.