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IFS calls for radical overhaul of the UK tax system

The Institute for Fiscal Studies (IFS) – a leading financial think tank – has published a review which calls for radical reform of the UK tax system, including abolishing fuel duty and stamp duty, expanding VAT and fully integrating National Insurance and income tax.

The Mirrlees Review, conducted over five years and published in two volumes, is described by the IFS as “the deepest and most far reaching analysis of the UK tax system in more than 30 years”.

It claims that even though the tax system means that the Government takes £4 in every £10 earned in the economy, poor tax design “contributes to an inefficient housing market, distortionary taxation of financial services, excessive reliance on debt finance, employment levels lower than they need be and distorted and inefficient savings and investment decisions”.

The Review aims to offer a “blueprint” for long-term reform. Proposals include:

· Replacing fuel duty with a comprehensive system of congestion charging on the roads

· Integrating income tax and National Insurance, since the latter “no longer serves any purpose as a separate social insurance contribution.”

· Simplifying the VAT system but also expanding it to include financial services and “nearly all spending”, with the money raised spent on cutting income taxes

· Introducing an Allowance for Corporate Equity into corporation tax to ensure equal treatment of equity- and debt-financed investments and that only profits above the normal return to capital invested are taxed”

· Abolishing stamp duty, which the Review describes as “among the most inefficient and damaging of all taxes.”

· Replacing council tax with a ‘Housing Services Tax’, with payments based on up-to-date house values

· Reforming environmental taxes so that charges on carbon emissions are applied consistently

· Making nearly all savings tax-free if they are “risk-free”.

There are also proposals on work incentives and the benefits system, with the Review in favour of the Government’s aim of replacing most of the current multiplicity of benefits with a Universal Credit.

The Treasury has responded by saying that it would need to look carefully at any costing of tax reform, which had not been addressed in the Mirrlees Review, while

some of the suggested reforms were already underway, such as merging NI and income tax.

Other commenters have observed that in the current economic climate there will be little political will to take on such large-scale reform projects.

But Sir James Mirrlees, the Nobel Prize-winning economist who led the review said: "[The tax system] could raise as much revenue and achieve as much redistribution as it currently does in far less costly ways. There is no getting away from the political difficulty associated with some of the proposed changes. But there is also no getting away from the enduring costs of failure to reform."