Sunday, January 24, 2021
Tax rises aren't easy, so Sunak will have to proceed with stealth and reform
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt.

There are some traditions that, even in a pandemic, are being maintained. When March budgets were the norm, it was traditional at this time of year for tax ideas to be run up the flagpole to see whether they would fly. While gardeners can measure the approaching spring by the appearance of crocuses and daffodils, economy-watchers could see it in the form of budget stories.

Last Sunday this newspaper reported that government sources were still indicating that a corporation tax hike was still on course for the March 3 budget. The story was widely followed.

This, you may recall, was part of a trio of tax rises that the Treasury was reportedly considering last summer, in order to bring the public finances back under control after the pandemic. Another was to more closely align the taxation of capital gains and income, as recommended by the Office of Tax Simplification (OTS), which was asked by Rishi Sunak to look at it. The third was an old favourite, reforming higher rate pension tax relief.

There are some serious sums to be raised in these areas. Every percentage point increase in corporation tax, currently 19%, raises an eventual £3.4bn a year, so a phased increase of five percentage points, which has been suggested, could bring in an additional ££17bn a year. The government has already turned against the corporation tax mantra of George Osborne and Philp Hammond, cancelling a planned cut from 19% to 17% last April.

The OTS pointed out that capital gains tax raised a relatively small amount, just over £8bn, in comparison with income tax, and covered a relatively small number of taxpayers. Its proposals, if adopted, would widen the net and bring in significant additional revenue.

Pension tax relief costs £21.2bn a year, with most of that going to higher rate taxpayers, with an additional £18.7bn of relief on employer contributions.

The idea that corporation tax could begin to rise in the March 3 budget has already drawn a frosty response. It looks like no way to treat businesses emerging from the worst recession in centuries and, as is likely at the time of the budget, still subject to significant restrictions. The chances of the current lockdown being lifted by then look slim.

Not only that, but only a few days ago the prime minister assembled the great and good from British business to advise him on the post-Covid recovery. I doubt that any of them would say that the best way to do that would be to whack up business taxation. It is hardly a welcome sign to international businesses to invest in the UK, when set against the disadvantages that Brexit will impose. “Global” Britain would look as if it was pulling up the drawbridge.

Some of the attacks on the suggested corporation tax hike, is from the usual suspects, like the Taxpayers’ Alliance and Institute of Economic Affairs, which tend to oppose any increase in tax. But some of it comes from business advisers aware of the signal it would send, not to mention the reality of paying more tax.

Nobody should underestimate the challenge faced by the chancellor. In his budget he will want to persist with his them of supporting jobs, as he has done since the start of the pandemic. On question will be whether the furlough scheme needs to be extended beyond the end of April. He will also want to set out an economic vision for the country beyond the pandemic, some of which he has already touched on in declaring that the City of London can enjoy a second “Big Bang”.

Understandably, too, he will want to show that his concern about returning the public finances to health is not just a political slogan; he means it. It is understandable. The Treasury has just published its latest compilation of independent forecasts. The average new forecast for public borrowing this year, 2020-21 – the budget deficit - is £399bn, with a high of £450bn. More troubling for the chancellor is that the average new forecast from next year, 2021-22, is just over £200bn, with the gloomiest £275bn.

These are big figures but three things act as constraints. The first is timing. Osborne was widely criticised for announcing a big tax increase, VAT up to 20% from 17,5%, in his June 2010 budget, alongside the austerity cuts in public spending. But that budget was a year after the economy had started to recover and the VAT hike did not take effect until the start of 2011. Any tax hike announced in March would be while the economy was still in recession.

Second, no tax hike is easy, as the backlash against the corporation tax suggestion shows. There should be plenty of low hanging fruit, like the ability of a government committed to net zero being able to raise the duty on petrol and diesel. But any Tory chancellor who tries it is guaranteed a huge backbench revolt.

Third, the Tories committed not to raising any of the three main taxes – income tax, National Insurance and VAT – in their manifesto for the December 2019 election. Plenty of people say to me that there is no need, political or otherwise, to respect a manifesto drawn up in a pre-Covid period. The overseas aid commitment, which was also in there, has been abandoned. I agree, but the government appears to want to stick to it.

What can a chancellor do? The answer, it seems to me, is to unveil a series of reforms that will raise revenue in the medium and long term, without getting in the way of the recovery – which will be driven by an easing of restrictions – later this year.

On corporation tax, the chancellor could do a “reverse Lawson”. When Lord (Nigel) Lawson was chancellor in the 1980s he cut the rate of corporation tax decisively, partly funding it by also getting ride of the many reliefs that could be set against the tax. Instead of this, short-term reliefs in the form of more generous investment allowances could be announced to lift a feeble business investment outlook, alongside an intention to gradually raise the rate of corporation tax later. There are some good ideas in the OTS’s capital gains tax proposals.

There is talk too of a reform of property taxation, which makes a lot of sense. The current system of council tax, stamp duty, business rates and inheritance raises a lot of money but is messy and inefficient. Stamp duty, reduced by the chancellor last July, has been described as the worst tax in Britain and the Mirrlees Review, under the auspices of the Institute for Fiscal Studies, called for its abolition, while the IFS itself has recently described council tax as “out of date, regressive and distortionary”. There has not been a property revaluation for council tax purposes for 30 years.

There is no silver bullet when it comes to property taxation. But any chancellor who wants to leave his mark should be looking at it.

Finally, there is taxation by stealth. As a simple example, the personal income tax allowance and higher rate threshold do not have to be raised every year, as was the case even during the austerity years after 2010. After a national emergency there is nothing wrong with bring more people into the income tax net. Raising the personal allowance was a tax cut by stealth. Freezing it would be opposite.