Thursday, March 17, 2016

Taking the long road

George Osborne's budget was an incoherent collection of gimmicks. It was not designed with any other purpose but the promotion of its author and a certain faux stability ahead of the EU referendum in three months time. 

So, easy to criticize, but the fact is that at the moment, no political party in the UK is prepared to suggest the kind of reforms that are needed. The political cycle is too short for any government to reap the reward of the kind of radical changes that are required, but not long enough for the same government to avoid the negative consequences that such radical reform will inevitably bring with it. So, successive governments merely tinker with the system, knowing that to do more carries greater risks and limited rewards in the short term.

The cost of tax administration in the UK continues to increase, and the ever more complicated system imposes greater fiscal drag and ever more distortion of the economy. Incomes remain heavily taxed, while land is barely taxed at all- a distortion that has helped to create an increasingly dysfunctional housing market. Addressing the tax of land and property would help to release the significant percentage of the housing stock that is empty because there is no incentive to let it or sell it. "Buy-to-leave" has become a major problem across the country, but especially in London. It is a national scandal and one which Mr. Osborne's supporters have a vested interest in perpetuating. It is well beyond bizarre that HMRC's own office buildings are held in tax avoiding off-shore trusts, and high time that assets such as land and property were taxed in the same way, or at least to the same degree as income.

As for income tax itself, the highly regressive nature of the UK tax burden remains disguised by the nominally progressive setting of different tax rates, but it is still the case that the tax burden falls excessively on the lower and middle income groups. A wholesale reform and simplification of tax is long overdue. The current administrative cost of the collection of tax at over £20 billion is nearly five times greater than the fiscal gap that Mr. Osborne sought to plug with his regressive cuts to disability allowance and other benefits. The burden on the private sector is greater still. A flat tax with a tax threshold that is set at median income, so that only the top earners pay income tax is both far cheaper to administer and far fairer than the current system.

The Liberal Democrats have an opportunity to build a programme of effective, efficient and fair taxation. Now is the time for the policy teams to embrace a genuinely radical platform that unites taxation and benefits, as we have long advocated, but also to build in local and national accountability into the tax system. The original idea of pension and welfare insurance must surely be restored, and the promotion of savings and investment made fashionable once again. We have the opportunity- and as Mr. Osborne now, and Mr. Brown in the past show- no one else is prepared to offer leadership. Yet without reform, future chancellors too will be reduced to the ineffectual tinkering that George Osborne has presented to the House of Commons this week.

As the clouds of the next financial crisis gather, the time for action is already getting late in the day. We must set out on the long road to reform as soon as we can.

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