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John O'Connell: The right formula for tax reform – a lower burden, a simpler system, and a longer outlook | Conservative Home

John O’Connell is the chief executive of the TaxPayers’ Alliance.

To whom are the Labour party referring when they say “taxes on working people will not rise”?

After Jeremy Hunt challenged Labour to not increase Capital Gains Tax (CGT) and Stamp Duty, Labour’s press team was quick to churn out that line, one which Rachel Reeves has been repeating throughout the campaign.

Do people who buy and sell houses not have jobs? Are people who make investments for their family’s future not using the proceeds of their work?

Maybe there are a tiny number of exceptions at the margin. But it would be good to ask Reeves exactly what the threshold is to be a working person, and at what salary you cease to be a working person.

What about an MPs’ salary of just over £90,000? Are they “working people”? I would believe the Shadow Chancellor if she said she works hard as an MP and shadow minister – she clearly does. Has she ever bought a house or made an investment? If so, is she no longer a working person?

It is a serious point. Labour are likely to form the next government and it is not clear what their plans for tax are, apart from the catchy slogan. This leaves them a lot of room to hike a host of taxes at their first Budget.

Indeed, on Thursday we saw reports that Reeves is already under pressure from backbench colleagues to increase CGT at her first opportunity. Alongside that, it was suggested that she had “ten or twelve” measures in mind that would raise “small pots of money”.

Voters ought to be aware of what those measures are. They might like some, all, or none of them – but they deserve to see the full picture.

Election campaigns will always focus on taxes at some point, and after Rishi Sunak claimed that taxes would go up by £2,000 per household under Labour during last week’s TV debate, we’ve definitely arrived on brass tacks in the 2024 contest.

Regular readers might be reasonably familiar with a TaxPayers’ Alliance diagnosis: consecutive governments can’t kick the spending habit, meaning taxes are too high and remain complicated, so as to hit us from every conceivable angle.

The four and a half years since the last election have been a torrid time for taxpayers. Set against the recent (and welcome) cuts to national insurance rates, and the earlier ‘full expensing’ of business investment, have been a barrage of tax hikes, not least in the rate of corporation tax and the long freeze of allowances and thresholds for income taxes.

The overall result is best measured by the ‘tax burden’, the share of the economy syphoned out in taxes to pay for government programmes. It has risen to 36.5 per cent this year, the highest since 1949, and in the OBR’s outlook is forecast to rise further still every year.

Dealing with this problem should be the first of three themes of the manifestos. At the very least, taxpayers deserve a break from the relentless rise in the tax burden and so all parties should pledge to cap it at its current level.

But the Conservatives should go further. Tories should set out an ambition to cut the tax burden, recognising not only is it the default conservative moral attitude to want people to be able to spend more of their own money on their own priorities rather than those of politicians, but it’s also a fundamental component of any serious plan to restore economic vitality to the nation.

Incentives matter, and as a recent TPA study of the literature showed, there’s a wealth of evidence linking lower tax burdens with faster growth and higher incomes.

But national debt has soared to close to 100 per cent of GDP and following the worldwide rise in interest rates during 2022, no government can afford to be glib about borrowing and debt. If that wasn’t enough, the outlook for public finances is deteriorating, thanks primarily to an ageing population increasing demand for state pensions, social care and healthcare expenditure.

Indeed, the OBR warned last year that on current trends spiralling debt interest costs will (albeit after a lull in the 2030s) put debt “on an accelerating trajectory to 310 per cent of GDP by the mid-2070s”.

So tough decisions need to be made about spending and long-term reform of public services. That isn’t to say that now is the time for specific details on how to constrain the public sector so that the tax burden can come down. But it is the time to set the direction, and to be frank about the mistakes that were made over this parliament in setting the wrong direction.

The second theme should be simplification. The tax system is an awful mess, with marginal rates well above 50 per cent (especially so if you add in benefit withdrawal rates) in many places and a Byzantine mix of overlapping and fiddly taxes.

Happily, committing to the first theme of reducing the tax burden will make it much easier to simplify, as simplifying often entails complete deletions of tax types or bands from the code.

Raising thresholds of charges like stamp duty or inheritance tax to £1 million or £2 million would go a long way to making the tax system simpler for people taken out of their ambit, just as raising the personal allowance did for low earners in the 2010s. But abolishing them altogether should be the ultimate goal, removing tax headaches entirely.

The third theme should be extending the horizon of the system, making it less short-termist and doing more to reduce the long-term impact of tax on growth. At present, the framework for the public finance debate are the Government’s self-imposed fiscal rules and the five year horizon for OBR forecasts.

Yet as noted by Jeremy Warner in the Daily Telegraph, the International Monetary Fund recently made an interesting recommendation in its Article IV assessment of the UK economy: the OBR’s Economic and Fiscal Outlook should instead work to a ten year horizon.

That would give more time for the forecasts to show the longer-term benefits of policy change, whether its tax cuts or increased capital expenditure.

(Although anything that encourages longer-term thinking should be encouraged, we should be simultaneously aware that extending the horizon comes with a serious risk of manipulation. We shouldn’t forget that under Tony Blair and Gordon Brown virtually all spending – current as well as capital – was described as “investment”; it’s easy to see how the change to the OBR’s could facilitate another spending splurge.)

In sum, the manifesto should promise a lower tax burden – not just lower taxes in this or that particular tax – and the reform and prudence needed to make it viable. It should promise simplification, lifting more people out of taxes and abolishing some entirely.

Finally, it should promise a longer-term approach – something that would benefit to many policy areas beyond taxation, too.

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