Bronwen Maddox, CEO, Chatham House
- Bill Dodwell, Tax Director, Office of Tax Simplification
- Helen Miller, Deputy Director, Institute for Fiscal Studies
- Martin Wheatcroft, adviser and Fellow, ICAEW
Bronwen Maddox: Hello and welcome to a special episode of the Insights In Focus podcast. I’m Bronwyn Maddox. Today we’re discussing how changes to UK tax architecture and design may strengthen the national bargain at a time of economic turbulence. National bargain: that’s the broad agreement that taxation is a fair exchange for the provision of public services. And it has of course fluctuated over time. Recent polling by YouGov finds the prevailing attitude among the British public has turned towards fiscal tightening. However, following unprecedented financial support during the pandemic, and the cost-of-living crisis, the tax burden is set to continue rising until 2027/28. That leaves the government with a difficult conundrum. How can it meet people’s expectations while paying down its debt at a time of slow growth? To discuss strategies for solving this, for better aligning tax perception with tax reality, I’ve got a terrific panel here. Bill Dodwell, Tax Director at the Office of Tax Simplification – hi, Bill.
Bill Dodwell: Hello. Glad to be here.
BM: Very good to have you. Helen Miller, Deputy Director at the Institute for Fiscal Studies.
Helen Miller: Hello, thanks for having me.
BM: Great to have you also. And Martin Wheatcroft, ICAEW Advisor and Fellow – hi, Martin.
Martin Wheatcroft: Hello.
BM: Very good to have you all here. Well, let’s start with the first part of this, if you like, setting the scene and talking about that national bargain, why people pay tax at all. Martin, perhaps you can kick this off for us.
MW: There is a very general bargain, and also some specific bargains, about how the tax system works and people’s attitude to tax. People have a general view that they want public services, and they’re prepared to pay tax. But there are a lot of contradictions in that. So people generally, if you ask them about any specific public service, they would be very happy – or in fact would like – to see more spent on it. But overall, they would like spending to come down and their taxes to come down.
BM: Bill, you accept we’re in a country – and it doesn’t go for all countries – where people accept that they pay tax in order for the country to run?
BD: Yes, we do. There is a pretty high level of compliance with our tax obligations here. HMRC reckons that 92% of tax just rolls up every year. Their compliance activities bring in another 3%, and 5% disappears for a whole range of different good or bad reasons. So it’s a really, really high compliance country. It means we’ve got relatively good tax morale, you know, the desire, if you like, to contribute to tax generally. And so it’s important that we continue to maintain that and support that national bargain, if you call this the beginning.
BM: Helen, do you think that national bargain is in jeopardy in any sense? Things like complexity, people’s sense of fairness, and so on.
HM: I think the broad sense in which people want to pay their taxes to get some services back… the idea that we think of tax as been something that’s done to us… but actually most of us realise that we pay in taxes, we get services back. I think the complaints come from the amount of tax, and of course people can reasonably disagree about how much we should pay in tax, and the level of services we should get and the size of the state. So there’s some disagreement there. And I think people feel unhappy when they either find something that’s very complex, or something that feels very unfair, so they might not like a particular part of the system. But I don’t think we’re in danger of actually having a breakdown in the fundamental bargain. I think the debate’s going to be around the edges, about how much tax, who should be paying tax, how should we distribute it across different people. So it’s almost about adjustments to the bargain, as opposed to fundamentally trying to take it down.
BM: So let’s go into those points that Helen just raised, and talk more generally now about the situation today, what is working and what isn’t working. Helen, just following on from what you’ve said, what would you say is working, and you’ve written about some of the positive points of the British tax system, and just begin to take us into what isn’t working?
HM: I think one thing to bear in mind – and this is a bit what Bill was bringing up, I think – is that big picture: we have a very sophisticated tax system that brings in really quite a lot of money quite easily. So the government is getting on towards raising 38p in every pound. That’s a pretty big tax take. It does that at relatively low cost. And of course, as we’ll get on to, there are bits of the system that don’t work very well, and they’re unfair, and they’re too complex. But we manage to run a pretty big system, and a fairly big state. So there’s some positive underlying news there. In terms of complexity and problems, however, it’s actually hard to think of a tax that hasn’t got a fairly big, if not fundamental design problem at its heart, and that couldn’t do with some sort of major reform. So just to flag one that I think particularly important: we tax different forms of work really quite differently, in particular self-employment and employment. That’s always been true, but it’s become more of a problem as more people have moved into self-employment. I think that’s a big, knotty issue right at the heart of our tax system.
BM: Bill, do you want to pick up on that?
BD: Yes. No, I do agree. The changing patterns of work have led to those differences being exacerbated. They’ve always been there – Geoffrey Howe, if you go back to Margaret Thatcher’s days, looked at this but didn’t actually do anything effective. And we’ve had quite a lot of years without trying to do anything very effective about it. But the related point as well is the location of work. If you go back to Victorian times, then all the work that took place took place in the country. But we now live in a global world where factories have been exported, if you lie, to other countries, although people are now raising questions about security of supply. But we’re now seeing a question whether labour can be exported, so that instead of writing your computer program, or instead of giving your marketing advice on the spot, in the country, you can actually do it in a different place. And the pandemic exposed that a lot because we all started to work from home. And some people suddenly thought, Oh, well, couldn’t home be somewhere different, in a different country? So we’ve got to deal with that as well.
BM: So these are individual decisions, and decisions by companies, perhaps…
BD: They are.
BM: …by people who are working for companies about whether to relocate things. What is the implication for Britain’s ability to collect tax?
BD: I don’t think we really know for certain what the answer there is going to be. We are a really big country, we have lots of people, we have lots and lots of reasons to be in the UK – a fantastic university system, for example, and all sorts of other things that go with it. And so the question is, is this at the margins where half a dozen people will choose to work somewhere completely differently? Or is this actually the start of a sort of change of the fundamental order? But for me, it’s important that governments in general – political parties in general – start to discuss these types of issue, because unless we do discuss it in a fairly open and straightforward way, we won’t end up managing to continue to reach a consensus for the future. And that matters a lot when it comes to imposing change. Helen said, self-employed people pay less tax on the same pound of income. And you can afford that a bit, but you can’t afford too much of that, otherwise, you’ve got to raise more money elsewhere in the system.
BM: Martin, is this something that you think is a real threat to government’s ability to raise tax? And is it the kind of thing that governments talking between themselves might actually solve?
MW: I think one of the interesting aspects of this is what you might call a lack of tax norms. There’s no particular accepted level of taxation, either personally or as a business, that is the right level of tax – the bit where you feel uncomfortable if you’re paying too little, or feel aggrieved if you’re paying too much, although I think everyone feels aggrieved if they’re paying too much. So I think that’s one of the fundamental challenges that tax authorities and policymakers have, trying to find a way of making people comfortable with paying sufficient tax to pay for all that government wants to do. Interestingly, though, there is a start of a development on businesses with BEPS and with the international…
BM: Just explain BEPS for us, briefly.
MW: Well, I’m not going to go into too much detail, but it’s an international project to try and align corporate taxation around the world. And in particular, one of the aspects of it is to have an accepted norm around the minimum amount that large corporations should pay, which is– 15% has been identified. And that’s the start of an approach where, I think, over time, if a big company is paying less than 15% of their profits in taxation, that people start to ask, why are you managing to get away with that? Because there’s this international norm– as well as the legal aspects of BEPS, it’s the international norm is being developed.
BM: It’s really interesting you say that, and a norm is being developed, and that has followed discussions between governments. [unclear] But you mentioned, within what you were saying, paying too much and resentment about that. And Helen mentioned a sense of fairness. Helen, what do you think contributes to people’s sense of fairness, because obviously this takes us to the heart of politics? These are deeply political decisions, in the best sense of the word, of what people should pay.
HM: I think there’s at least a couple of different aspects people have in mind when they think about fairness. I think one would be the procedural fairness, so the idea that you should know your tax bill, you should be treated fairly by HMRC, you shouldn’t have an arbitrary tax bill, and kind of horizontal equity. So if you and I have the same income, we should pay the same tax. That kind of fairness strikes most people at least as some fundamental principle underlying the tax system. And I think people often get unhappy when they perceive that one group or one kind of person has a lower tax bill than other people who have the same underlying income. So that could be the self-employment and employment example, it could be somebody who’s earning capital gains rather than labour income, it could be a large company or a small company, and it’s those examples where people feel like you’ve got away with a lower share than somebody else who’s like you. I think most have a problem with that. And that often comes from a real problem with a tax system where we do treat similar activities differently. That creates a whole bunch of problems. I think unfairness is one of them.
I think a different aspect of fairness is people just disagree and have different views on how much the rich should pay versus the poor and the redistribution question. And that will be linked to a whole load of things, including service provision. So if people think that the poor get a lot from the system in some dimension, it could be health spending or education spending or welfare, they may feel differently than if they think everyone gets the same benefit from the state. And I think that’s a much harder, thornier issue, because there’s not a right answer there. People can reasonably disagree about how redistributed the state is and should be. I think also, that’s an area where people lack information quite often, people often think that– they don’t necessarily know where they are in the income distribution, or how much people like them pay. They often underestimate how much the rich pay, or they take individual examples of people paying low rates and assume that everyone’s like that. So I think there’s also a lot quite a lot of misunderstanding. But even if we cleared that up, I think people would disagree about what a fair system looks like. That’s what we need politics for, to jump in…
BM: That is the point of democratic politics.
HM: Exactly. And sort of find an answer to them.
BD: And the related question is that governments have got to think how to best grow their economy. And part of that involves putting incentives into the system. So an incentive essentially means somebody pays less tax to encourage what the government sees as a beneficial activity. And how you fit that in is another sort of aspect, all of that. And sometimes that might even conflict with a perception of fairness. Because fundamentally, only wealthier people, people further up that income scale or asset scale, can afford to make those investments that the governments would like to see.
BM: Perhaps you could just give us a few examples of incentives to invest?
BD: Well, for example, for individuals, there’s something called the Enterprise Investment Scheme. And that says, if an individual invests in a small, unquoted trading company, they can deduct 30% of their investment against their income tax, they get effectively a tax refund for all of that. So if I put £100 in, I get £30 back from the government. And that’s done to encourage the growth of smaller enterprises which governments over time feel have contributed better to the economy. It’s not to discourage multinationals as they also do something. But if you haven’t got those smaller feeder companies in the system, then perhaps your economy is missing out. And so that’s an example of something. That costs the Exchequer something like £500 million a year, which in the context of £950 billion raised in total isn’t huge. But some people say, well, rich people get this tax benefit. And they do, because only rich people can afford to invest in this sort of way.
BM: So Martin, we’re beginning to dig into some the kinds of complexities that there are in the tax system. Are there any others that are really front of your mind about complexity that perhaps gets in the way of the tax system working well?
MW: I think there are too many examples to choose from. [laughter] We’ve ended up with a system of so many different bands of income tax and National Insurance that there is no single rate of tax that we pay. And it’s quite complex about how much of the next pound of earnings is going to be taxed, added to, for example, the complexity of something– if you’re a parent and have Child Benefit, that’s withdrawn when the higher earning parent reaches £50,000 a year. And you end up getting a spike in your tax rate. It could be above 50 or 60% that you’re paying suddenly, when you hit £50,000. Again, when you hit £100,000, you end up paying a 60% tax rate. So there can be quite a lot of complexities across all areas of taxations. But there’s no particular reason why the tax system has to be so complicated. It’s just built on a history of previous tax decisions. And nobody’s found the time – absent the officer for tax simplification – to try and unwind a lot of that. And it’s very difficult as the OTS has found.
BM: As the OTS indeed has found. [laughter] Bill, just take us into the job of trying to grapple with the sedimentary layers of tax policy that have been laid down by government after government.
BD: It’s hugely challenging to do. For me, I think we should look more closely at administration of the tax system. Because a big piece of having tax easier for individuals in particular is can we make the system help them in a better way? Ever since 1944, when Pay As You Earn was introduced, we started to manage people’s affairs so that most individuals don’t have to do a tax return in the UK – about 12 million do, but on the other hand, there’s about 34 million total income tax payers, so you can see that it’s less than one in three income tax payers actually has to do a tax return. And that’s because the system is operated by about two million businesses and other organisations. But we can do more. And we ought to take better advantage of technology here, where we get more information in from third parties, such as banks, for example, such as investment managers in relation to dividends of other sorts of areas – put that information into the system. So that, again, people don’t have that complexity, and more is done for them using today’s technology.
Our tax systems in the UK are not bad, but they could be a lot better, is the honest answer. And too many of our systems were written in the last century. And I know that was only 25 years ago, but to say a computer system like the state pension system dates back to 1988 is just not a good look. And bits of the income tax and other tax systems operated by HMRC have exactly the same sort of challenges. We actually need a medium-term investment plan here, involving billions. And I know we talk fantastically about HS2 and the railways, and you can see all that. And when it whizzes up and down between London and Birmingham, won’t it be fantastic. But actually, what is probably more important is having really good government systems in DWP and in HMRC.
HM: Another example that just shocks me every time I think about it is council tax. We have a council tax system, the tax on property based on values in 1991, over 30 years ago, and that has real implications for fairness, because basically property prices have changed differentially across the country. And in a nutshell, if we did a revaluation today based on current property prices, you’d see bills being much lower in the north and much higher in the south. Then the minute I say that, you can see why politically it’s difficult, but said differently, it means that basically the southerners are getting a tax break and northerners are paying higher tax rates, purely because we didn’t get ourselves together and revalue our council tax. So not only is it… it could it be even better, at the moment in some cases it’s actually pretty bad. And we should basically use the investment in updating values to sort that problem out.
BD: But you’re giving a good example to me of where we actually need to devise a whole new approach to taxation of property. Because simply putting up council tax values would be difficult, for the reason you’ve just stated. Perhaps we should look separately at something new, something that perhaps combined a mixture of stamp duty land tax or transaction tax with the occupancy tax and the services tax, which is council tax.
BM: There’s been much criticism of stamp duty for deterring movement and much criticism of the council tax for being too low in many important areas. But you’ve put your finger on the heart of it, which is that this is not just an administrative change investing in new systems, it is a deeply political one where the losers are going to shout very loudly, and the winners be quietly happy.
HM: Of course, the longer you leave it, the worse that gets. I think Bill’s right, you could imagine– me personally, what I would do is scrap stamp duty altogether and revalue council tax or something like it, a tax on the value of property that people live in. And you could have all sorts of transitional arrangements and movements towards a new system, you could have put in place a system that’s going to update every year [unclear and if I’m not getting a decision in the future]. Of course, I can see why no politician wants to grasp it today. But I wouldn’t be surprised if the only way to get around it is to scrap the current system and to put something new in place, because the optics will be easier. But at what point are we going to say we’ve got a system that’s 100 years out of date? At what point are we going to just have to change? It’s going to be so absurd.
BM: So how important is stability? We’re sitting here talking about lots of radical changes, making a very persuasive case, it seems to me, for some of these, but Martin, how much does stability matter?
MW: Well, stability is quite important, but it shouldn’t stand in the way of change. And I think what Helen was saying around having good transition between one system and another, we’ve just had quite a sharp increase in corporation tax, but it was at least flagged so people knew it was going to happen, or mostly knew it was going to happen. But having such a big step change was not good. And if you were going to change something quite so radically, you could have phased in over a decade, and people would have just built it into their plans and it wouldn’t have been such a big change. Again, we’ve had quite a lot of tinkering with the system rather than a planned evolution of the system. That is one of the real challenges: we lack a clear tax strategy or a fiscal strategy about how we’re going to evolve the system. So a lot of the challenges that we get, a lot of the complexity that we get, is built in because we haven’t got a plan and we don’t know where we’re going. And I think if we did have a plan, part of it would be an evolution towards a simpler system. But we struggle to identify a way of doing that.
BM: You, in talking about a plan, imply there could be just one national plan, if you like. And I’m thinking, as you were talking, of the armwrestling between Labour and the Conservatives over pension taxation on a very, very short-term possible timescale.
BD: I agree, you have these big things, pensions, for example – a brilliant example, something that’s really long lasting, something that matters, something that you need regular people who aren’t tax experts just to understand it, because you’ve helped them with that longer-term consistency. But we have seen far too many changes in that sort of area. And this one, you can just imagine, the current chancellor, Jeremy Hunt, only took over last autumn, so he never had very long to think of his pension plan and to work on it. And perhaps we needed a broader review of the system. But we have to build up a better form of consensus, let’s just say, because you can’t have something where one party – something that’s big and important, and matters to a lot of individuals – where one party thinks x and the other party thinks exactly the opposite. That is a really challenging thing, to produce that sort of long-term consistency. Everyone says though that we shouldn’t have change because it’s complicated, and obviously, that’s true. But then everyone would like change, because they’d like to see something different in the system. So that’s one of the inevitable conundrums of tax, and I come back to my point on technology: we’ve got to use more technology in a better way to help people with that complexity and help manage that change.
HM: Just to add, I think the irony is that we do have a huge amount of change and it keeps people like us in business. But the irony is that it’s not very good change. So politicians, almost often they’ll see some kind of fundamental problem. And most tax experts would agree with the big-picture, fundamental solution that would get you a much better system, but rather than tackle that head on they do some little tweak to it. So you get lots of these little tweaks, that adds this sense of an unstable system that has lots of complexity, but you’re never actually having a– Did you move towards something more stable? No, because you just did a partial tweak. So I think it’d be so much better if there’s at least a sense of here’s a big tax, here’s where we want to get to, that’s hard, it needs a long-run solution, we’re not going to get there in another 10 years, but we’re going to do these things and they’re all moving in the right direction. At least then you would build towards it rather than– Something like the annual investment allowance, which is the allowance of incorporation tax, that has gone up and down and up and down, and up and down. And even temporary changes, permanent changes, temporary changes. And it’s like, nobody knew for ages what that was doing, we’ve wasted so much money on an incentive that companies couldn’t plan around because it moved around so much. Had they just said, here’s our long-run plan for that part of the system, and here’s where we’re moving towards it, it would have been so much more efficient. I think that’s what we really lack is the– people can disagree about the movements, but there’s no underlying sense of what the system is trying to move towards. So this movement is wasted.
BD: We’ve got one area that is ripe for that sort of broader discussion, which is how do we deal with the change in use of vehicles between petrol diesel vehicles and electric ones? Because petrol diesel, we charge on usage, we have a duty on the fuel and so on. Should we have the same for electric cars? Or should we have a mileage charge?
BM: Just hold that question for a second. Let’s use that as a pivot to go on to our third bite at this, which is the future. We started off with a very solidly positive account of the bargain, if you like, that the UK is doing well in that people and companies agree why they’re paying tax. And then we dived into the complexity and the many things are that don’t work, including some of the biggest and most important taxes. But let’s just look forwards at what needs to change now, to strengthen this national bargain, to improve the system. Bill, do you want to pick up right where you were with electric vehicles and what is changing right now about that?
BD: Well, at the moment obviously electric vehicles are more expensive than petrol or diesel vehicles. So governments wanting to encourage greater take-up have had to provide incentives in the system. They’ve done that in the form of lower taxes on the purchase of the vehicle, and lower taxes on the use of the vehicle to compare to the petrol diesel equivalent. But fuel duty brings in something like £28 billion a year, and vehicle excise duty, that sort of standing charge, is another seven. So that’s £35 billion. And the question is, how are we going to deal with that in the future? Because one option obviously is to say, Well, don’t worry about it, we won’t charge anything on electric vehicles. I doubt if that would be an acceptable point of view to the vast majority of citizens generally. And so the next question is, so what do we do? And we need to start exploring those alternatives in public. One of the things I think is really important is, you could have congestion types of charge as we have in central London. But that’s massively expensive to operate because it involves cameras or some sort of tracking devices everywhere. It’s quite invasive of individual privacy, which is another interesting question to deal with. It’s also got a huge problem of who actually goes out and collects all this tax, because at the moment, it’s fairly easy: fuel duty, you buy petrol or diesel at the garage, the garage collects the money and send it off to the Exchequer. You can’t really administer that for 33 million cars in a straightforward way. If you’ve got to have a government agency that‘s sending out 33 million bills every month, to do all of that’s not a practical system to think about. So I’d rather we explore these issues out in the public.
BM: That’s a really good example you’ve given us. It’s changing right now – needs decisions. They’re not particularly political decisions but they do need to be made with some consistency, and the investment then, as you said, in systems behind that. Martin, what would you change?
MW: One thing I would say just before moving on to answering that question is just on the challenge that HMRC has in actually digitalising the tax system. We’ve seen that with the recent National Audit Office report into Making Tax Digital, which is highly critical of HMRC’s ability to implement digitalisation in the tax system. We’ve got to really invest. HMRC needs to really have the resources to invest in digitalisiing, the tax system appropriately, because if you don’t invest, we’re going to get into the situation that HMRC is currently in, where it’s deadline slip, and it continues to be even more uncertainty in the tax system for taxpayers about what’s going on and what they can believe when the tax authorities come along and say that they’re going to do this by then, and of course ‘then’ slips and it doesn’t happen.
So coming back to your question again, it’s less about what specifically – because I think we’re in a target-rich environment, there’s so many things in the tax system that need resolving – but I think it is building that strategy. And that’s irrespective of who’s in power. I think the change in government should be about changing in effect where you are on the system. But you need a core system that’s able to…
BM: By “where you are on the system”, you mean, for example, how much tax different groups pay, as opposed to changing the actual principles of it?
MW: Yes, I think what you need is a structure and underlying stability in the tax system and an evolutionary path that everyone is clear on. But the precise rates that you pay, what is the amount you pay, that’s down to those political decisions around what sort of size of state you want to invest in. But that underlying structure needs to be built in a way that, in effect, the new captain of the cruise ship comes along and decides which port you want to go to. But you still need a ship, and you need the good engineering for the ship to function.
HM: In general, people tend to vastly overestimate how much our tax system needs to change for the future. There’s always something – it’s robots or whatever it is most recently – people think we need some radically different system. I think we don’t actually. For the most part, we need a well-designed system that is flexible enough to incorporate really quite a lot of changes. So if we had a system that properly treated different ways of working, and was robust to people changing how they worked, that treated property consistently, capital incomes consistently without disincentivising incomes, then actually the world could change quite a lot and our tax system – the underlying ship image, to follow Martin’s example – would be fine.
So I think the biggest thing we could do for the future is sort out the tax system today. Sorting out a tax system that worked better today would be much better for the future. I think the two exceptions to that are the one that Bill started with on the environment. That’s where today’s system, we know, will not be right for the future, because we know that fuel duty will not be there. We also know more broadly, if we really want to change incentives around getting to net zero, we should really be moving towards some sort of consistent tax price on carbon, and we are nowhere close to that consistent price. Our tax system is all over the shop in that regard. So the environment is the one place where we do need proper change.
And the other challenge is the mobility issue. And we’ve already said mobility is already a problem with our corporations–
BM: [unclear] Of individuals or companies?
HM: So currently it’s companies that are causing us problems, because we try to tax companies where they make their profits. And because they can move, governments compete over that activity. And I think what Bill was laying out is that we don’t know what’s going to happen in the future, but what would be a risk to the tax system, it’s going to be if individual people start being able to move and account for tax when they do that. And therefore governments are going to have an incentive to try to compete to get those people. Now, who knows whether that’s going to happen or not, but that will be something where it’s a little bit out of our control if that happens in the world. But again, aside from those two things, I think the best thing we could do to future-proof the system is create a system that works better today. Then we’ll be able to incorporate property prices changing, people changing how they work. Without this, what we currently have, if something changes like property prices go up in one part of the country or people move into self-employment and suddenly we’ve got these massive tax problems cropping up. That’s a design problem. That’s not the world change problem, that’s a ‘We didn’t have a good tax system’ problem. And that’s completely within our remit to fix.
MW: Just to add to that, one of the challenges we have, particularly with how taxes are established and dissolved in this country, is that we redesign the system every time we want to tweak the system. So we introduce a new tax with a new set of rules. Because we haven’t built in that flexibility to the underlying system, policymakers come along and they see something and they create a whole different system for their tweak. And that adds to the complexity rather than, for example, if you had a standard system of incentives, that you could just say, well, I want an extra incentive for this, and I’ll just add it into my existing suite of incentives. No, we’ve got to design a whole new incentive system from scratch and create a new complexity in the tax system. And that’s an underlying design problem in in the UK tax system
BM: At exactly this moment, we have this very complex tax system. Bill, how much do you think education can help, before we get around to these reforms that we’ve all been discussing here.
BD: Education helps a lot. There’s some research that demonstrates that the more people know about the tax system, the more likely they are to understand it and think it’s a reasonably fair system overall. It’s where they don’t understand things that they suddenly think, oh, X or Y isn’t paying tax. And Helen said earlier on, there’s plenty of examples of picking individual X and saying they’re not paying very much tax, and ignoring the fact that actually there’s a multiplicity of others who are paying plenty of tax, and that there’s a few outliers and all of that. So education would help a lot. It’s not part of the National Curriculum, tax is scarcely ever taught in schools, which is great shame. Financial education, of course, is another big aspect of that, and tax is only one part of financial education. But [we’re] trying to do more on that. And trying also to think about the practicalities of tax, because there’s plenty of occupations where helping people more with practicalities– particularly around the self-employment world, where trying to work out how much money you’ve made, it’s always going to be a more awkward issue compared to being an employee, generally, where you’ve probably got a better answer, even though there may be bonuses and other sorts of things in the system. But for self-employed people, that record keeping, and what’s the difference between sales and costs and profits, we could bake more into that tax system. And that would help a lot, I think.
BM: Helen, perhaps you can help us round off all this by looking at the big picture, which IFS has written extensively about, and that is whether this country is collecting enough tax to pay for all the things that people tell their politicians they want – particularly, I’m thinking, given an ageing population, with the health service and pensions.
HM: I think it’s worth saying that it’s what people want. We do have a choice here, we absolutely could choose to not raise any more tax, or even to cut taxes. What we can’t do – nobody thinks this, once you’ve looked at the numbers – what we can’t do is continue to grow services and maintain or cut taxes, you can’t square that circle.
You mentioned ageing there – that is going to be a major pressure. Basically, we have a population that’s ageing quite quickly so we have more older people, and older people tend to demand not only more health and social care, but also more expensive health and social care. So health and social care gets more expensive at the end of life. So the longer people live, which is something to be celebrated, it just costs us more. Even to maintain the current level of services, not to have any new innovation of anything, just to keep giving healthcare of the same quality to more people and older people, would put pressure on the health service. That’s actually been happening for a while, and the reason we’ve got away with not noticing it is because for quite a long time – ’80s, ’90s – we managed to increase health spending while we were cutting defence spending: a peace dividend. So you managed to actually increase health spending by quite a lot without having to do anything radical, because you were just shifting spending. Those days are gone. There are no easy cuts out there. You could make cuts, but a lot of departments now have actually been through a decade or more of pretty big cuts. You’re not going to find easy cuts to those departments. So if we, as a society, want to maintain and/or increase services, I think we have to look at higher taxes, which for the UK would be historically unusual. That wouldn’t be unusual internationally, there are plenty of well-functioning societies that raise more in tax. I think what it does mean, all the things we talked about today, about the design of the system, becomes even more important. So the more money you are going to take from people, the more important is that you get it right in terms of efficiency and both horizontal and vertical equity, and that having systems like council tax based on 30-year values, all of that becomes harder and harder to think is okay once you’re going to raise more and more money.
BD: And we have to bear in mind when we do that we can’t raise that money just by taxing half a dozen rich individuals. That is never going to repeat [unclear], even if it’s feasible, and I’m not suggesting that we’ve got our systems best designed in those sort of areas. But actually, Helen’s talking about raising tax on the generality of the population. And that’s why having a discussion publicly about it is important.
BM: That is, I think, the perfect place to wrap this particular discussion up, though it’s hardly one that is going to be over just with what we’ve said. But we’ve had clear votes for simplification, for more education, for quite a lot of reform, and for taking the country into this kind of conversation about the national bargain, about what people want to pay and what they are likely to get. So thank you, Bill, Helen, Martin, for sharing your thoughts on what is an incredibly complex topic but a very rich one, no pun intended. It’s certainly one that we’re going to keep watching in the years ahead.
Listeners can visit the Future of Tax and Public Spending hub on the ICAEW website for more on what we’ve been discussing today, including the latest research on public attitudes towards taxation. You’ll find the link to the hub in the show notes for this episode. Regular host Philippa Lamb will be back later this month for an In Focus episode, discussing developments in sustainability assurance and whether it’s prohibitively costly for SMEs. In the meantime, please rate, review and share this episode. And remember to subscribe to ICAEW Insights wherever you get your podcast.