Tax Reform Commission

7.59.00pm GMT Sat 5th Jan 2008

Comments on the Forsyth commission set up by the Conservatives to review tax policy...

In October the Tax Reform Commission, set up by Tory leader Dave Cameron, produced its report.

The report made a splash on the day of publication but was forgotten by nightfall, as the leadership seemed to be somewhat embarrassed by some of the recommendations.

The official line is that the report will be considered as and when the Tories decide on their policies. In fact what I suspect will happen is that Dave will go into the next election promising to keep to the previous government's spending plans for the first year.

This is unfortunate as the report deserves to be taken seriously. This article is intended as a critical and constructive response.

As the report itself admits, the first problem is with the terms of reference. These are to examine the impact of international tax policy on Britain's competitiveness, to consider direct taxes with a view to simplifying the system and looking at flat(ter) tax rates, and to "recommend a set of policy options with the aim of improving the economic efficiency, transparency, simplicity and fairness of the system."

This is all very well but what about the Council Tax and local taxation generally? Having set up this body of experts and a-list economists it seems a pity not to do the job properly and review the way we're taxed at all levels. Neither does the commission look at savings, pensions, or the interaction of tax credits with the benefits system.

Even more curiously in view of Dave's recent announcements is that environmental taxes are beyond the remit of the commission.

The central assumption of the report is that tax levels are too high and the system is too complex. It's taken as axiomatic that reductions in tax levels will generate more tax revenue, and that simplification will do likewise.

This may be true, but equally may not be. If a business reduces its prices it will probably sell more of its product, but won't necessarily make higher profits. Simplicity should result in more compliance and a reduction in pressure on businesses and individuals, but could also generate inefficiencies and unfairness if not done carefully.

Many of the proposals would be likely to benefit the better off, such as the suggestion that, though a pure flat tax is not appropriate for Britain, a half-way house of flatter rates is desirable. Increasing the personal allowance to £7,185 and abolishing the 10% rate would however take 2.5 million people out of tax altogether and minimise the absurd position we have under Mr Brown's system of people paying tax to the Inland Revenue with one hand whilst receiving tax credits with the other, at vast bureaucratic expense in the process.

The amalgamation of National Insurance and Income Tax also makes sense.

The report suffers by looking very much like work in progress, making statements but then saying 'more research is needed to see if this really works'. Statistics are distorted to prove points, leaving open goals for those who may try to discredit them. Wording is sometimes muddled. "The UK economy would PROBABLY respond (to tax cuts) in a similar way to the US economy. It therefore SEEMS CERTAIN that there would be some dynamic response. How significant it would be remains unclear." Certainty doesn't seem! The statement that "most submissions received by the Commission do not believe these issues are not insurmountable" probably means the opposite of what's intended.

Despite saying that green taxes are beyond its remit the commission does take the trouble of rubbishing them. "The temptation to use tax to ...achieve certain social ends should be resisted."

Some of the proposals would increase the very complexity the commission seeks to reduce. For example the introduction of a transferable allowance for couples with young children. This would however make more sense if taxation of the family unit rather than the individuals within it were taken further.

On business taxation the unproven proposition is that business is overtaxed. "Twenty years ago companies paid £10.7bn representing 19% of direct taxes. In 2005/6 the tax yield is ... £41.3bn, representing almost 22% of direct taxation." Mr Brown would probably claim this as a success story and proof of his making Britain a good place to do business. The flatter rate proposed by the commission would actually result in higher tax for small businesses whilst benefiting bigger ones.

The report also disses the democratic process. "The House of Commons is not capable of providing sufficiently effective scrutiny of finance bills on its own." The solution of fetching in the unelected House of Lords to do the job is perhaps what one would expect from a bunch of city worthies who perhaps see a peerage, if they haven't got one already, as a just reward for their labours.

The commission suggests an "Office of Tax Simplification" to be set up at a cost of £3m per year to scrutinise all ministerial proposals. Better surely to embed the principle of simplification within the Treasury.

This report overall contains much good material, and there is much within it that Liberal Democrats could support. This tends though to be the obvious, and as the report goes into more detail it gets weaker.

It is probably obsolete already as the debate moves on to environmental taxation, but it will be interesting to see what, if anything, the Conservatives use from it as we approach the next election.