Two major tax reforms the government should see through

There’s been some promising chatter in the run-up to next week’s Budget about two major changes to our tax system. Both of the ideas have often been talked about across the political spectrum. Both are also ideas which politicians have previously ended up shying away from because of the political hurdles involved.

First is integrating income tax and national insurance. As The Independent reported,

The move is expected to be signalled by George Osborne in his Budget next Wednesday. Although such a huge change would take years to implement, the Chancellor is determined to be seen as a reformer and not just as the axeman who cleared the budget deficit he inherited from Labour.

The idea has been under discussion for years, but politicians have shied away from implementing it. Such an upheaval would be bound to create winners and losers, and the effective abolition of national insurance – currently at 11 per cent for employees, rising to 12 per cent next month – could be portrayed as a tax hike, taking the basic rate from 20p to 32p and top rate from 40p to 52p in the pound…

The proposed merger would be welcomed by small businesses. A survey of them by the Treasury’s Office of Tax Simplification found almost unanimous support for the idea. In its interim report this month, the office said the two parallel systems distort behaviour as people…

A study by the Institute for Fiscal Studies last year said: “The current UK tax system is opaque and unnecessarily complex, imposing two entirely separate taxes on earnings – income tax and national insurance contributions.”

This reform could make for a much simpler tax system that is cheaper to run, is more accurately administered and makes for a better relationship between level of income and level of tax.

The downsides are that technically it is complicated to do, with likely controversy in the short-run and political benefits deferred until sometime in the future. It’s easy to see why politicians have backed away in the past.

But now that the contributory principle behind national insurance is anyway long since eroded, it is still the right policy to aim for.

So too is having a greater share of local government’s income raised locally. Thus far the government has given local government greater control over what it spends – which is good – but without also greater control over its income, that is always going to hobble meaningful devolution of power and responsibility.

However as 24dash.com reports,

Eric Pickles has today set out a vision of ‘self-funded’ councils that keep their local business taxes with reduced central grant dependence.

Again, this is an area where political heat has made many politicians back away from reform – and there is the related problem that far too much of public spending is directed via central rather than local government.

But it’s also the right thing to do and local business taxes should therefore be the start, rather than the end, of reforming local government finance.