Tax system for low-to-middle income groups needs reform

Politicians must ‘grasp the nettle’ of tax reform, according to a think-tank report. The existing system of redistribution through tax and benefits is inefficient, and needs to be replaced by one that provides ‘redistribution at lower cost’.

The report draws on findings from the Mirrlees review (2011) and the Commission on Living Standards (2011). It sets out structural reforms designed to improve support for households on low-to-middle incomes. Simply making the existing system more generous to this group will not be sustainable in the long run, it argues.

Key areas for reform

  • The tax and benefits systems must do more to ensure that work pays for key groups. For parents, cash benefits could be made more generous for younger children and less generous for school-age children, when parents are more likely to want to work. For second earners, the new universal credit system could introduce a separate disregard, allowing them to keep more of the money they earn. For older workers, national insurance contributions could be reduced either by bringing forward the age at which people stop paying them to 55 or by increasing the threshold at this age, and perhaps delaying the age at which pension credit becomes available.
  • Value added tax should be reformed by ending the practice of extensive zero and reduced rating, with the money used instead to increase benefits and cut other taxes.
  • Council tax property values must be reassessed. The values are now more than two decades out of date. Poorer people in low-value homes pay a higher proportion of their property value than richer people in more expensive homes.
  • Both capital gains tax and inheritance tax should be reformed by removing certain exemptions.
  • The tax treatment of pensions should also be reformed: for example, by reducing the size of the tax-free lump sum, and possibly by levying national insurance on employer pension contributions.

Source: Paul Johnson, Fairer by Design: Efficient Tax Reform for those on Low to Middle Incomes, Resolution Foundation
LinksReport | Resolution press release
See also: Mirrlees review (summary) | Commission on Living Standards report