Changes of government have often led to less substantial divergences in tax policy than one might think.
It is a common complaint about politicians and governments that they only look to the next election and prioritise short term considerations but ignore long term planning. I would contest this. In the past couple of years, we have seen the opening of the Elizabeth Line which took 13 years from its inception. We have seen the launch of the aircraft carriers, Queen Elizabeth and Prince of Wales which started when Gordon Brown was Prime Minister. HS2 is a project that was conceived when Tony Blair was Prime Minister. There has been the roll out of Universal Credit which started a decade ago and has shown its ability to cope with demands arising from the Covid pandemic which the legacy systems did not.
There are plenty of other examples of long-term planning, whether it be new national forests or measures to achieve net zero by 2050 which show governments looking well beyond the horizon of the next election.
There are two factors which encourage long term planning. The first is the existence of an independent civil service which looks well beyond the electoral cycle. The second is the desire that elected representatives have, to leave a legacy.
How does this work in terms of taxation? Beyond the sound and fury (often signalling very little) in the political debate, there is a greater consensus in terms of tax policies. This means that changes of government have often led to less substantial divergences in tax policy than one might assume from the newspaper headlines. For example, Her Majesty’s reign could be divided in tax terms into two. The 27 years up to 1979 which had high tax rates (income tax 83% on earned income, 98% on unearned income, capital transfer tax 75% and corporation tax 52%). The following 43 years saw a substantial reduction in all three marginal rates to 45%, 40% and 19% respectively.
The interesting element of this policy is that the lower rates of tax which were initially implemented by Conservative governments were accepted by Labour governments and indeed the Labour government continued the policy of reducing corporation tax. The policy of keeping rates of tax lower but reducing allowances which were seen to distort economic behaviour has remained a relatively consistent policy since 1979; indeed, Rishi Sunak’s attempt to increase corporation tax in 2023 was probably one of the contributing causes to his losing the Conservative Leadership election.
Apart from rates of tax, there has been some other areas where policies have been continued and expanded by governments of different colours. Self-assessment tax returns are 25 years old, but the system is still being refined with digital improvements. Research and development tax relief introduced by Gordon Brown has been extended and made more generous by the governments that followed him. The Labour Liberal pact of 1978 introduced the first approved share scheme. This was extended by the subsequent Conservative government which introduced the Save as you earn plan and the approved share Option Plan. The Labour government in 2000 introduced the Share Incentive Plan and the Enterprise Management Incentive Plan. The reason for this bi-partisan approach was the view across the political spectrum that employee share ownership was to be encouraged by giving it some tax advantages.
Another good example of a policy introduced by one government and expanded by another is the Substantial Shareholder Exemption, which was introduced by Gordon Brown and extended in 2017.
Finally, the ISA (individual savings account) which was originally introduced by John Major as PEP’s (personal equity plans) and TESSAs (tax exempt savings accounts), but which became rebadged as ISAs under the Labour government and have remained materially unchanged for over 30 years.
Is this continuity of consequence?
The stability in large parts of the UK tax system allows for greater confidence in both personal and business decisions. Whilst it is a regrettable feature that the UK tax code has inexorably increased in size, it is often forgotten that significant parts of the tax system which affect both individuals and companies have remained substantially unchanged over decades. This, in my view, is a strength of the system, and allows individuals and businesses to plan with a greater degree of confidence. I would contend that the tax system today with all its shortcomings is a better one than we had 50 years ago. Radical changes in the system would probably create large disruption for very little gain.
Changes of government have often led to less substantial divergences in tax policy than one might think.
It is a common complaint about politicians and governments that they only look to the next election and prioritise short term considerations but ignore long term planning. I would contest this. In the past couple of years, we have seen the opening of the Elizabeth Line which took 13 years from its inception. We have seen the launch of the aircraft carriers, Queen Elizabeth and Prince of Wales which started when Gordon Brown was Prime Minister. HS2 is a project that was conceived when Tony Blair was Prime Minister. There has been the roll out of Universal Credit which started a decade ago and has shown its ability to cope with demands arising from the Covid pandemic which the legacy systems did not.
There are plenty of other examples of long-term planning, whether it be new national forests or measures to achieve net zero by 2050 which show governments looking well beyond the horizon of the next election.
There are two factors which encourage long term planning. The first is the existence of an independent civil service which looks well beyond the electoral cycle. The second is the desire that elected representatives have, to leave a legacy.
How does this work in terms of taxation? Beyond the sound and fury (often signalling very little) in the political debate, there is a greater consensus in terms of tax policies. This means that changes of government have often led to less substantial divergences in tax policy than one might assume from the newspaper headlines. For example, Her Majesty’s reign could be divided in tax terms into two. The 27 years up to 1979 which had high tax rates (income tax 83% on earned income, 98% on unearned income, capital transfer tax 75% and corporation tax 52%). The following 43 years saw a substantial reduction in all three marginal rates to 45%, 40% and 19% respectively.
The interesting element of this policy is that the lower rates of tax which were initially implemented by Conservative governments were accepted by Labour governments and indeed the Labour government continued the policy of reducing corporation tax. The policy of keeping rates of tax lower but reducing allowances which were seen to distort economic behaviour has remained a relatively consistent policy since 1979; indeed, Rishi Sunak’s attempt to increase corporation tax in 2023 was probably one of the contributing causes to his losing the Conservative Leadership election.
Apart from rates of tax, there has been some other areas where policies have been continued and expanded by governments of different colours. Self-assessment tax returns are 25 years old, but the system is still being refined with digital improvements. Research and development tax relief introduced by Gordon Brown has been extended and made more generous by the governments that followed him. The Labour Liberal pact of 1978 introduced the first approved share scheme. This was extended by the subsequent Conservative government which introduced the Save as you earn plan and the approved share Option Plan. The Labour government in 2000 introduced the Share Incentive Plan and the Enterprise Management Incentive Plan. The reason for this bi-partisan approach was the view across the political spectrum that employee share ownership was to be encouraged by giving it some tax advantages.
Another good example of a policy introduced by one government and expanded by another is the Substantial Shareholder Exemption, which was introduced by Gordon Brown and extended in 2017.
Finally, the ISA (individual savings account) which was originally introduced by John Major as PEP’s (personal equity plans) and TESSAs (tax exempt savings accounts), but which became rebadged as ISAs under the Labour government and have remained materially unchanged for over 30 years.
Is this continuity of consequence?
The stability in large parts of the UK tax system allows for greater confidence in both personal and business decisions. Whilst it is a regrettable feature that the UK tax code has inexorably increased in size, it is often forgotten that significant parts of the tax system which affect both individuals and companies have remained substantially unchanged over decades. This, in my view, is a strength of the system, and allows individuals and businesses to plan with a greater degree of confidence. I would contend that the tax system today with all its shortcomings is a better one than we had 50 years ago. Radical changes in the system would probably create large disruption for very little gain.
