UK tax system needs urgent reform, think tank warns

By on 15/07/2019 | Updated on 24/09/2020
Shrinking stacks: Substantial reforms are required to UK tax policies, the Institute for Government says (Image courtesy: PublicDomainPictures/Pixabay).

The UK’s tax system will be unable to meet the dual challenges of a shrinking tax base and rising demand for public services unless it undergoes major structural reform, a think tank has warned.

A new report, ‘Taxing Times, published today by the Institute for Government says future leaders will be faced with a stark choice: raise funds through additional taxation or borrowing, or drastically shrink the scope of public services. 

But flaws in the system will make it harder to address this choice, the researchers say, and will require “sensible, principled reforms [that] could allow governments to raise revenues with fewer detrimental side effects, and render the system more resilient to fiscal pressures.”

Lower income, higher outgoings

“This is not merely a problem for future generations, but one that will become increasingly acute over the next decade,” the report says.

In particular, the UK’s ageing population will create increased demand for spending on health, adult social case and pensions. Unless taxes or borrowing goes up, it says, spending on education, policing and defence will have to halve in size as a share of the UK economy over the next 50 years.

Further threats to the existing tax base include the rise of fuel-efficient and electric vehicles – which lead to lower fuel duty and VAT takings, and pay lower annual ‘road tax’ charges – and a reduction in smoking. Together, these shifts will see the government receiving around £10bn (US$12.5bn) per year less revenue from fuel and tobacco duties by 2030-31, in today’s terms. The rise in “lightly-taxed” employment practices such as self-employment and company owner-management will also lead to lower revenues for the Treasury. 

Value creation gets elusive

Globalisation and the shift towards a digital economy are also reducing revenues, making it difficult for the government to raise revenue from taxing large companies as it becomes “increasingly difficult to pin down where value is created and increasingly easy for companies to structure their affairs so as to claim value is created predominantly in low-tax jurisdictions.”

The pressures faced by HM Treasury – an ageing population, behavioural changes resulting in less tax revenue, and problems taxing globalised corporations – are similar to those faced by many Western governments. Recently-closed Canadian public-policy think tank, The Mowat Centre, raised similar concerns in a study last year which warned that disruptive technology and an ageing population could be storing up trouble for future Canadian governments.

Joe Marshall, researcher at the Institute for Government and author of the report, said: “It is not only the amount of tax revenue raised that matters. How it is raised is also important. Politicians of all political stripes must start thinking seriously – and speaking openly – about the need for tax reform and how they can help overcome the barriers that stand in the way of change.” Bronwen Maddox, director of the Institute for Government, said: “Successive administrations have taken tax policy for granted. Given that these changes – entirely foreseeable ones – are underway, we need to start taking tax policy seriously.” w

About Natalie Leal

Natalie is a freelance journalist whose work has been published by The Sun Online, The Guardian, Novara Media, Positive News, and Welfare Weekly, among others. She also writes reports and case studies on global business trends for behavioural insights agency, Canvas8. Prior to working as a journalist Natalie worked for the public sector in social services for several years. She switched careers in 2013 after winning a fully funded NCTJ in a national writing competition. She holds a Masters degree in social anthropology from Sussex University where she specialised in processes of social change and international conflict and reconciliation processes.

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