COMMONS

MPs publish report on principles of tax policy

15 March 2011

The Commons Treasury Committee says that tax policy should be measured by reference to principles in new report

The Government has said it is committed to a new approach to tax policy making, designed to support its ambition for a more predictable, stable and simple system. The report welcomes this commitment, but expresses concern that the Government has not done enough to set out the principles underlying that policy. In this preliminary report, the Committee has endeavoured to identify these principles and consider how tax policy can best support growth.

Treasury Committee Chairman Andrew Tyrie said:

"In this report, we have endeavoured to create some common ground, with the intention of encouraging greater stability in tax policy making. Our aim, as a cross party committee, has been to produce a number of tax policy principles, which are accepted across the House. We intend to consider the measures contained in future Budgets against these principles."

Findings

In the report, the committee discusses the principles separately, but notes that a tax system which is theoretically structured to promote growth, that is, which has the basic principles right, will not succeed if businesses are faced with constant change, or if the inefficiency of collection outweighs any benefits. Moreover, it notes that even if they are stable, clearly targeted, and efficiently collected, taxes can reduce growth - for example where the system contains incentives which distort economic activities.

Andrew Tyrie said:

"The coherence of the system affects the basic principles of both fairness and growth—a system which is riddled with anomalies will not be considered fair and will impair economic performance. It also matters for the procedural principles of certainty, stability and practicability, since incoherence will make all of these harder to achieve."

The report warns that a tax system which is felt to be fundamentally unfair will quickly lose political support. Although judgements about the fairness of policy details are politically contested and a major way in which parties distinguish themselves from one another, there is a significant amount of consensus on fairness, and differences are often matters of degree and emphasis, it says.

The report adds that, although using taxation to support wider policy goals should not be ruled out, indiscriminate use of taxation may increase the complexity of the system and be counterproductive.

It also notes that the scope for tax arbitrage has grown substantially over the last quarter of a century and globalisation is likely to increase it further. A tax system which is not competitive by international standards will not support growth. Competitiveness is also not a simple matter of tax rates, although they have a bearing, but of the stability of the system as a whole.

 

Andrew Tyrie said:


"Governments should be wary about using tax policy as a substitute for direct policy measures, doing so only after careful analysis shows it to be the most effective tool. In setting taxes, Governments should be alert to the effects tax policies will have on economic growth."

Conclusions

The report concludes that tax policies provide the framework for our tax system. The tax raised by these policies taken together funds the UK economy, it says.

The report recommends that tax policy should be measured by reference to the following principles. Tax policy should:

  • be fair. The Committee accepts that not all commentators will agree on the detail of what constitutes a fair tax, but a tax system which is considered to be fundamentally unfair will ultimately fail to command consent
  • support growth and encourage competition
  • provide certainty. In virtually all circumstances the application of the tax rules should be certain. It should not normally be necessary for anyone to resort to the courts in order to resolve how the rules operate in relation to his or her tax affairs
  • provide stability. Changes to the underlying rules should be kept to a minimum and policy shocks should both be avoided. There should be a justifiable economic and/or social basis for any change to the tax rules and this justification should be made public and the underlying policy made clear
  • the Committee also considers that it is important that a person’s tax liability should be easy to calculate and straightforward and cheap to collect. To this end, tax policy should be practicable
  • the tax system as a whole must be coherent. New provisions should complement the existing tax system, not conflict with it

Andrew Tyrie said:

"No tax system is, or can be, static. There will always be trade-offs and difficult decisions; a desire for fairness may increase complexity; a desire for certainty may increase administrative complexity. Nonetheless, the principles our Report today sets out, which reflect a surprising degree of convergence from the evidence we took, give a direction of travel which, in the long run, we hope can both secure consent and improve the performance of the economy."

Further Information

Image: iStockphoto

More news on: Parliament, government and politics, Parliament, Economy and finance, Taxation, Commons news, Committee news

Share this page