Tax reform is a rare beast. It will be delivered only if there is agreement on what change should happen; a plan on how to deliver it; affordable reform, with strong political support and widespread public acceptance of the need for change. Only very rarely do all five of these come together.
Sir Edward Troup, former HMRC first permanent secretary, discusses the five key ingredients for tax reform.
There are those who say taxes need to be reformed, there are those who say taxes need to be raised. And there is the public who are neither interested in reform nor want to pay more tax.
While increasing the tax burden is possible – and has been achieved more often than the public have noticed – tax reform is a much rarer beast. Only tax advisers towards the end of their careers will remember the last occasion of real tax reform – Nigel Lawson’s 1984 Budget – and even that did not attempt to reform the taxation of individuals. Perhaps only Lloyd George in 1909 and Gladstone in 1853 can stand up real claims to be reforming chancellors.
Of course, there has been, and continues to be, change in the tax system, but some of it has been unintended, much of it incremental and almost all of it long-term. If we (and I include myself) would both like to see reform and believe that a crisis in the public finances is the opportunity to make change happen, we need to ask why reform is so difficult and what might make it possible.
Five key ingredients
The recipe for reform has five ingredients:
1. A solution: there needs to be agreement on what change should happen.
2. The route: there needs to be a plan to get us from A to B.
3. Money: the reform has to be affordable.
4. Will: politicians must want to engage in reform.
5. Acceptance: the public must support, or at least accept, reform.
Only very rarely do all five of these come together.
Identifying a problem is a long way from providing the solution: we know that the taxation of multinational companies is failing, with the burden of tax on capital now falling unevenly and often unfairly. But there is no agreement on what reform should take place. Effective international corporate tax reform may simply not be possible where countries cannot agree on the solution.
And where a solution exists, entrenched rights may make the route to reform near impossible. There is emerging agreement that pension tax relief should be limited, but the inherently long-term nature of pension taxation and the peculiarities of defined benefit pension schemes makes mapping the path from today to any new system exceptionally hard.
Tax is always about money. Reform means change and a change which does not involve a substantial giveaway must mean some will pay more and some less. Nigel Lawson presented his 1984 Budget as revenue neutral but this was a sleight of hand – the initial annual cost to the exchequer was £1.7bn (over £5bn in today’s money) and even then he faced entrenched resistance.
In a democracy simply being right is not enough: there must also be the political will for reform. The pages of this and other publications show that there is much agreement among economists and tax professionals about what reform should happen. But all reform, however sensible, requires a minister to stand up in Parliament and justify the change. Pressures on time, political agenda and legislative priorities crowd out the merely sensible.
Last, but emphatically not least, is public acceptance. The simplification of VAT rules in 2012 was sensible, affordable and had political will behind it. Rebranded as the ‘pasty tax’ it failed spectacularly, not because it imposed unreasonable burdens on individuals but because it was seen as an unfair attack on a national food. Such resistance is often hard to anticipate (I speak from the painful experience of being involved in the 2012 Budget) and can only be overcome, if at all, by political heavyweights.
The pages of this, and other journals, may well prescribe sound routes to better tax systems and we may even find the route, the funding and the will to support those reforms, but in the chaotic and often populist politics of the 21st century, do we have a Gladstone to deliver them in the face of an ungrateful public?
Tax reform is a rare beast. It will be delivered only if there is agreement on what change should happen; a plan on how to deliver it; affordable reform, with strong political support and widespread public acceptance of the need for change. Only very rarely do all five of these come together.
Sir Edward Troup, former HMRC first permanent secretary, discusses the five key ingredients for tax reform.
There are those who say taxes need to be reformed, there are those who say taxes need to be raised. And there is the public who are neither interested in reform nor want to pay more tax.
While increasing the tax burden is possible – and has been achieved more often than the public have noticed – tax reform is a much rarer beast. Only tax advisers towards the end of their careers will remember the last occasion of real tax reform – Nigel Lawson’s 1984 Budget – and even that did not attempt to reform the taxation of individuals. Perhaps only Lloyd George in 1909 and Gladstone in 1853 can stand up real claims to be reforming chancellors.
Of course, there has been, and continues to be, change in the tax system, but some of it has been unintended, much of it incremental and almost all of it long-term. If we (and I include myself) would both like to see reform and believe that a crisis in the public finances is the opportunity to make change happen, we need to ask why reform is so difficult and what might make it possible.
Five key ingredients
The recipe for reform has five ingredients:
1. A solution: there needs to be agreement on what change should happen.
2. The route: there needs to be a plan to get us from A to B.
3. Money: the reform has to be affordable.
4. Will: politicians must want to engage in reform.
5. Acceptance: the public must support, or at least accept, reform.
Only very rarely do all five of these come together.
Identifying a problem is a long way from providing the solution: we know that the taxation of multinational companies is failing, with the burden of tax on capital now falling unevenly and often unfairly. But there is no agreement on what reform should take place. Effective international corporate tax reform may simply not be possible where countries cannot agree on the solution.
And where a solution exists, entrenched rights may make the route to reform near impossible. There is emerging agreement that pension tax relief should be limited, but the inherently long-term nature of pension taxation and the peculiarities of defined benefit pension schemes makes mapping the path from today to any new system exceptionally hard.
Tax is always about money. Reform means change and a change which does not involve a substantial giveaway must mean some will pay more and some less. Nigel Lawson presented his 1984 Budget as revenue neutral but this was a sleight of hand – the initial annual cost to the exchequer was £1.7bn (over £5bn in today’s money) and even then he faced entrenched resistance.
In a democracy simply being right is not enough: there must also be the political will for reform. The pages of this and other publications show that there is much agreement among economists and tax professionals about what reform should happen. But all reform, however sensible, requires a minister to stand up in Parliament and justify the change. Pressures on time, political agenda and legislative priorities crowd out the merely sensible.
Last, but emphatically not least, is public acceptance. The simplification of VAT rules in 2012 was sensible, affordable and had political will behind it. Rebranded as the ‘pasty tax’ it failed spectacularly, not because it imposed unreasonable burdens on individuals but because it was seen as an unfair attack on a national food. Such resistance is often hard to anticipate (I speak from the painful experience of being involved in the 2012 Budget) and can only be overcome, if at all, by political heavyweights.
The pages of this, and other journals, may well prescribe sound routes to better tax systems and we may even find the route, the funding and the will to support those reforms, but in the chaotic and often populist politics of the 21st century, do we have a Gladstone to deliver them in the face of an ungrateful public?
