Civil servants and their ministers should be devoting some of their time to laying the ground for reform of the UK’s tax system amid the coronavirus crisis – because its aftermath will provide a “rare chance” for change, according to the Institute for Government.
The think tank said that public appreciation for key services, health and social care in particular, meant that long-overdue changes to the way government raises revenue would be easier to discuss. It also noted that the multibillion-pound support and rescue packages announced by ministers would need to be paid for and may create a public desire for a permanently larger role for the state.
The IfG’s new report, Overcoming the Barriers to Tax Reform, says that civil servants in HM Treasury and HM Revenue and Customs – with the support of ministers – should now be preparing evidence to support the tax reform that would be both desirable and necessary in the wake of Covid-19.
The report said that part of the process should involve the creation of a tax commission to help generate public discussion of the problems with the current system and consider ways in which revenue could be better raised in future, and set strategic direction that had long been lacking.
Report authors Gemma Tetlow, Joe Marshall, Thomas Pope, Jill Rutter and Sukh Sodhi said that as well as longstanding inefficiencies in the tax system and extensive reliefs that had long outlived their purpose, 21st century working patterns made it more difficult for the government to raise revenue.
They noted that as well as being increasingly prevalent, digital businesses were harder to tax and that while self-employment was becoming more widespread, the self-employed were typically more lightly taxed than employees.
The report said that HM Treasury, which has around 200 staff focused on tax policy and which leads on tax reform, needed to do more to build public understanding of the need for change. The authors said it should do so by publishing the evidence government generates more openly and consulting on tax policy at an earlier stage more often.
The IfG said the Treasury also needed to work more closely with HMRC to evaluate tax policies and tax reliefs more systematically because evidence on the size and distribution of the economic costs imposed by the UK tax system was “weak”.
It said HMRC currently had 1,000 staff working on tax policy and a 150-strong “Knowledge, Analysis and Insight” team tasked with doing data-analysis necessary to design and implement policies, particularly policy costings.
The report authors said both departments could help improve the case for fiscal change by building stronger links with external researchers and granting them easier access to administrative tax data.
IfG director Bronwen Maddox said it was impossible to know how the landscape for government would look after the coronavirus pandemic had passed, but tax reform would be more critical than ever.
“The UK public may – as happened after the second world war – hold fundamentally different views about the role of the state and who should pay for that,” she said.
“At the very least, a higher level of public debt and borrowing may create greater willingness for paying more tax, as they did after the global financial crisis.”
Gemma Tetlow, who is the IfG’s chief economist, said that while reform may seem a long way from being a priority at the moment, the government’s extraordinary fiscal response to the coronavirus is only likely to exacerbate a need for reform that already existed.
“The government could do more to overcome some of the barriers that typically stand in the way of tax reform,” she said.
“Laying these foundations as soon as possible is important to allow the government to act when a window of opportunity opens up.”
Report co-author Joe Marshall said lessons from abroad indicated that sharing civil service analysis on the shortcomings of the current tax system more openly could help build public understanding and generate debate.
The IfG’s Overcoming the Barriers to Tax Reform report can be read here.