Economy

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My contribution to the Westminster Hall Adjournment Debate on the Tax System - 05 February 2002

Budget Commentary, March 2001- BBC Online

 

Hansard record of the Westminster Hall debate on the tax system, 05 February 2002:

Lynne Jones (Birmingham, Selly Oak): I congratulate the hon. Member for Fareham (Mr. Hoban) on raising this important issue and I agree with his conclusion. A simplified system would also remove much of the fraud in the tax and benefits system at a stroke.

When I heard about the debate, I searched through my files to locate a copy of the Saatchi and Warburton document that the hon. Gentleman mentioned, but I did not anticipate having the opportunity to speak. Indeed, I dashed to Westminster Hall this morning because I thought that there would be far more interest in the debate among other hon. Members than there is. The level of interest is surprising. I thought that, as hon. Members had to complete their tax returns only recently, the issue would have been weighing on their minds more, but apparently not.

We owe thanks to Saatchi and Warburton for pointing out the complexity of the tax and benefits system. As I recall, it has provoked me to table at least one parliamentary question, a copy of which I also managed to find. The answer to that question was that, in the year 2000-01, 69 per cent. of employees earning less than a third of male median earnings paid tax. Sadly, that percentage had increased from 56 per cent. in 1997-98. It is ridiculous that people on such low earnings pay tax and are probably at the same time forced to claim means-tested benefits.

The document entitled "Poor People! Stop Paying Tax!" points out that the tax system collects a staggering 63 per cent. of GDP, and the citizen must then claim back 14 per cent. of GDP by navigating more than 250 allowances, reliefs, exemptions, credits, tapers, indexations, disregards and so on. In the process, we employ 80,000 civil servants to collect the taxes and 60,000 to pay the benefits, at huge administrative cost.

I agree with many of the proposals suggested by people who might be considered my political opponents, which is important, because some consensus on the tax and benefits system is desperately needed. In opposition, parties are fond of highlighting the existence and availability of stealth taxes, but in government, they enthusiastically use them. Perhaps instead those in opposition and those in government should think ahead to how we might behave when our roles are reversed and try to achieve a consensus.

Yesterday, we had a debate about pensions. Bills on tax credits and pensions credits are currently passing through Parliament. Both types of credit increase the complexity of the tax and benefits system, which is deeply worrying, because the extension of means-testing

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and complexity creates disincentives to work and save and incentives to commit fraud. Surely it is not beyond the wit of man for us to agree on at least some broad principles.

I am glad that Lord Howe is involved in the tax rewrite project, but I agree with the hon. Member for Fareham that that is not sufficient. The system needs a radical overhaul, and I endorse the proposals made in the "Poor People! Stop Paying Tax!" document. A very large hike in the personal allowance is desperately needed, so that people can earn far more before they start paying tax. A 10,000 tax threshold is being advocated, which would be a radical change.

I have not done the sums, but the general principle of a large rise in the threshold, coupled with a simplification of the different income tax rates, is sound and reform is long overdue. Unfortunately, the Government have introduced greater complexity into tax bands. The 10 per cent. and 20 per cent. tax rates were merely a gimmick; it would have been better to put those resources into raising thresholds. We need to consolidate the various tax rates. We should have one basic rate, perhaps around 20 or 25 per cent., an upper rate that is higher than the present 40 per cent., and something in the middle, which would claw back the benefits from middle income earners—the bonanza that they would otherwise receive from large increases in personal allowances.

The interplay of national insurance contributions is also relevant. The Chartered Institute of Taxation and other organisations believe that the kink in the system—whereby between 29,900 and 34,000 the marginal tax rate for each extra pound drops from 32 per cent. to 22 per cent.—could be reconciled by raising the upper earnings limit for national insurance in line with the threshold for the higher tax rate. From my political perspective, that would also mean an increase in the tax take from higher earnings. That is unlikely to achieve political consensus, but agreement across the political spectrum could be achieved on the general principles if only the Government were willing to sacrifice some of their sacred cows.

To achieve a more simplified system, we need to restore universal benefits and reduce means-testing. I commend the Chancellor for increasing child benefit, but wish that he had not introduced the additional complexity of the children's tax credit, which effectively takes us back to the position when child benefit was introduced. At that time, family allowances and personal tax allowances meant that higher taxpayers gained more than others for bringing up their children. I acknowledge that the new children's tax credit system is more redistributive, but it is complex. A simpler system might continue with universal child benefit and ensure that it adequately reflected the additional cost of bringing up children. The better-off, including MPs like myself who receive child benefit, will have the additional income recouped through a progressive tax system.

I make no apology for wholeheartedly supporting progressive taxation and for being against increasing taxes for poor people, who should be less reliant on means-tested benefits. Such benefits will always be with us, but should be for the exceptional cases rather than for average groups of people.

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When child benefit was first introduced, it effectively rolled up a tax allowance into a universal benefit—a process for which there is more scope in future for other tax allowances. If a large increase in the personal allowance is the first step, the next step is a flat-rate benefit, otherwise known as a citizen's income. Again, the idea initially came from the right. It may have been proposed earlier, but to my knowledge the first suggestion was from Christopher Monckton, a researcher in Downing street in the late 1980s or early 1990s, when the Tories were in control. The idea may have a longer history than that.

Such a policy would draw people from both ends of the spectrum. It would maximise personal freedom and incentives to save. Every time that it is raised, people say that its time has not yet come. I disagree; in Ireland, for example, there are interesting debates on the subject. However, it may be a second step. As a first step, I plead with the Government to consider the direction that they have chosen and the complexity and amount of means-testing. In the future, 65 per cent. of pensioners will be subject to some kind of means-testing, and I doubt that that will be conducive to the Government's aim of increasing private savings. Surely, we can broadly unite around such principles. If there were the will, such changes could be introduced.

 

BUDGET COMMENTARY MARCH 2001

for BBC Online


There was nothing unexpected in the Budget. Most of the measures had been well trailed, either by the Chancellor himself or by academic commentators. The Institute for Fiscal Studies correctly predicted that there would be 3 to 4 billion extra to spend due to buoyant tax revenues and government underspending. Whilst this was no pre-election bonanza, the priority of investment in public services over tax cuts has been clearly laid out and will be the single most important issue over which the election will be fought. .The Chancellor even managed to massage his spending plans to give credibility to the charges that the Tories would make cuts of 16 billion. Thus, even if Gordon Brown’s speech was dull as ditchwater, the Government will succeed in uniting Labour activists in the fight ahead. The extra for parental leave and childcare is very welcome. The increase in the minimum wage is an added bonus.

Nevertheless, it is a pity that the Chancellor did not use the healthy state of the public finances to restructure and simplify the tax and benefit system. Raising personal tax allowances to take the lowest earners out of tax has a similar redistributive effect to widening the 10p tax band but is simpler and carries less red tape. Likewise, tax credits for families and pensioners extend means-testing and are complex both to administer and understand. They perpetuate disincentives to earn more and save, particularly when interacting with the housing benefit system, a serious problem that did not even get a mention. The extra money available would have been better spent on further increasing universal benefits like child benefit and the state pension. A new flat rate housing allowance could take people out of means-tested benefits, not draw them in. Less means-testing would do far more to reverse the decline in saving than tax breaks which simply result in savings being transferred into the most tax efficient vehicle. The extension of the 7000 annual tax-free ISA allowance will cost almost 3 billion and would be much better spent on pensions.

My other criticisms concern inadequate spending on public infrastructure and services other than health and education. The Government needs to look more kindly on local authorities struggling with inadequate budgets for social services and give assurances that capital spending, for example on housing and public transport, will reach the levels needed in the minimum amount of time, taking labour supply into account. The reliance on private finance is wasteful especially when government debt is falling well below Maastricht criteria. If local democracy is to be salvaged from its present parlous state, there will need to be more local accountability for spending decisions. Increased local tax-raising powers could be offset by a restructuring of VAT, largely reversing the increase the Tories used to make the council tax more palatable.

On the subject of VAT, the Chancellor has tinkered at the edges rather than follow the more radical approach suggested by Lord Rogers to remove the tax advantages of new build compared with renovation. This is a pity.

The Government also needs to be bolder on environmental policy. Following the retreat on fuel duty, we need to make the case for congestion charging and motorway tolls once there are good public transport alternatives.

Finally, a bit more praise! Unlike its predecessor, the Government, realises that our economic well-being depends on investment in new technologies and the skills of our workforce. The Government’s own spending on science has increased significantly and the Chancellor is listening to business calls for measures to encourage private sector spending on research and development and the recruitment of maths and science teachers. The resulting long-term prospects of low inflation combined with economic growth should reduce pressure on interest rates leading to the more competitive exchange rate so desperately needed by manufacturing - a virtuous circle engineered by a Labour Government!

 

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