Read more: How ditching paper could save the Treasury £10bn a year
We know one thing about next week’s Budget—that Chancellor George Osborne won’t reform the system of pension tax relief. And we can predict one more thing—that he probably won’t reduce the top rate of tax to 40 per cent. High paid workers will still grab the lion’s share of tax relief on their pension contributions—but will still have to pay 45p in every pound they earn above £150,000 a year of taxable income.
True, either measure on its own would have provoked howls of anguish—from the better-off over pension tax relief, and from everyone else over cutting the top tax rate. YouGov has consistently found that most people think the top rate should remain at 45 per cent, or go even higher, even if this raises no more tax than a 40p rate.
The solution is surely obvious. The Chancellor should do both things at once. There is a well-established principle that the best tax system is one that distorts behaviour the least. In practice this means keeping both tax allowances and tax rates as low as possible. In general, chancellors should tax people on more of their income, but at a lower rate.
Indeed, a thoroughgoing strategy to get the best-off to pay their fair share would be not only to cut their pension tax relief and top tax rate, but to do other things as well. One obvious example is to add raise council tax on the higher bands (as Scotland’s government is doing), so that people in the most expensive homes pay more. Another is to reform capital gains tax and dividend taxation, to stop company owners and directors being able to reduce their tax and national insurance bills by being remunerated in shares and dividends rather than earned income.
Were Osborne really bold, he would do all these things together, and make his name as a truly reforming Chancellor. But he won’t, at least not yet. David Cameron has told him to cause no turbulence in the run-up to the EU referendum in June.
That is fair enough as an exercise in prudent short-term political management. There is always next year. But in the past few days some observers have been bringing up the conventional wisdom that holds that big tax reforms are possible only at the start of a parliament. If Osborne ducks reform this year, this argument runs, he will have lost his chance.
I am not so sure. In the past, Prime Ministers hoped to call a general election after four years. Now we have fixed-term parliaments. Unless the government falls apart after the EU referendum—a possible outcome, but not a probable one—the next general election will not be until May 2020. Next year’s Budget will be more than three years before the Conservatives next face the voters.
This gives Osborne time to burnish his reformer’s credentials. The real question is this. Given his ambition to succeed Cameron as Prime Minister in this parliament, does he want to enter that contest with a reputation as a bold reformer, or a Tory who prefers caution, even if this means leaving a rickety and indefensible system of taxes and allowances in place?
Now read: The time to "fix the roof" has come
We know one thing about next week’s Budget—that Chancellor George Osborne won’t reform the system of pension tax relief. And we can predict one more thing—that he probably won’t reduce the top rate of tax to 40 per cent. High paid workers will still grab the lion’s share of tax relief on their pension contributions—but will still have to pay 45p in every pound they earn above £150,000 a year of taxable income.
True, either measure on its own would have provoked howls of anguish—from the better-off over pension tax relief, and from everyone else over cutting the top tax rate. YouGov has consistently found that most people think the top rate should remain at 45 per cent, or go even higher, even if this raises no more tax than a 40p rate.
The solution is surely obvious. The Chancellor should do both things at once. There is a well-established principle that the best tax system is one that distorts behaviour the least. In practice this means keeping both tax allowances and tax rates as low as possible. In general, chancellors should tax people on more of their income, but at a lower rate.
Indeed, a thoroughgoing strategy to get the best-off to pay their fair share would be not only to cut their pension tax relief and top tax rate, but to do other things as well. One obvious example is to add raise council tax on the higher bands (as Scotland’s government is doing), so that people in the most expensive homes pay more. Another is to reform capital gains tax and dividend taxation, to stop company owners and directors being able to reduce their tax and national insurance bills by being remunerated in shares and dividends rather than earned income.
Were Osborne really bold, he would do all these things together, and make his name as a truly reforming Chancellor. But he won’t, at least not yet. David Cameron has told him to cause no turbulence in the run-up to the EU referendum in June.
That is fair enough as an exercise in prudent short-term political management. There is always next year. But in the past few days some observers have been bringing up the conventional wisdom that holds that big tax reforms are possible only at the start of a parliament. If Osborne ducks reform this year, this argument runs, he will have lost his chance.
I am not so sure. In the past, Prime Ministers hoped to call a general election after four years. Now we have fixed-term parliaments. Unless the government falls apart after the EU referendum—a possible outcome, but not a probable one—the next general election will not be until May 2020. Next year’s Budget will be more than three years before the Conservatives next face the voters.
This gives Osborne time to burnish his reformer’s credentials. The real question is this. Given his ambition to succeed Cameron as Prime Minister in this parliament, does he want to enter that contest with a reputation as a bold reformer, or a Tory who prefers caution, even if this means leaving a rickety and indefensible system of taxes and allowances in place?
Now read: The time to "fix the roof" has come
