Taxation

Income tax and National Insurance contributions should be abolished as separate instruments and replaced with a single payroll tax levied at a flat rate on all earned income above a personal allowance. The merger must be accompanied by a reduction in the combined rate, so that the change is revenue-neutral rather than a stealth increase disguised as simplification. National Insurance has long since ceased to be a genuine insurance scheme; it is a second income tax with a misleading name, and the pretence should be abandoned.

The rate should be set at whatever level the Treasury judges will maximise long-term revenue — not the highest rate that can be politically sustained, but the rate at which the broadest possible base of economic activity is brought into the tax system without discouraging the work and enterprise on which that base depends. This is not a novel observation. It is the straightforward application of the principle that a tax which is too high collects less than one which is moderate, because people change their behaviour to avoid it.

A personal allowance should be retained, but considered afresh. The present allowance is generous — deliberately so, as successive governments have used it to take lower earners out of taxation entirely. This is presented as compassion but it is also corrosive: it produces a large class of citizens who receive the benefits of government while bearing none of its cost. A lower allowance, combined with a flat rate that applies from the first taxable pound, would bring more people into the system. The sums involved for the lowest earners would be small — a few pounds a week — but the principle is important. Taxation is not merely a mechanism for raising revenue; it is a bond between the citizen and the state, and it ought to be universal.

Capital gains should be taxed at the same flat rate as earned income. The distinction between the two is the single largest source of complexity and avoidance in the current system. A pound earned by working and a pound gained from selling an asset are both income. Taxing them differently invites people of means to restructure their affairs so that what is really employment income appears as capital, and a small industry of advisers exists to help them do so. Applying the same rate to both eliminates this at a stroke.

Corporation tax should be levied at a single flat rate on all profits, with the near-total elimination of reliefs, allowances, deductions and credits. The present system — in which the headline rate is set at one level and the effective rate is determined by a thicket of special provisions — is an invitation to gaming. Companies with the best advisers pay the least; companies without them pay the most. This is not a tax system; it is a subsidy for accountancy.

The rate should be set low enough to make Britain a genuinely attractive jurisdiction for corporate profits. The aim is not to win a race to the bottom but to recognise a reality: capital is mobile, and a country that taxes it moderately on a broad base will collect more revenue than one that taxes it heavily on a narrow base from which the best-resourced firms have already escaped. A low rate with no hiding places is both fairer and more productive than a high rate riddled with exceptions.

This approach also addresses the problem of multinational profit-shifting. When the domestic rate is competitive and the base is clean, the incentive to route profits through Ireland or Luxembourg is diminished. The goal is a rate low enough that the cost of avoidance — the fees paid to lawyers, the operational inconvenience of artificial structures — exceeds the tax saved by the effort.

Inheritance tax should be abolished. It raises relatively modest sums — roughly £7 billion a year at its peak — while imposing significant costs in planning, avoidance and distortion. The wealthiest estates avoid it almost entirely through trusts, business property relief and agricultural relief; it falls instead on those of moderate wealth whose principal asset is the family home. The tax produces a cottage industry of estate planning whose sole purpose is to help people lawfully avoid a levy that Parliament has made avoidable for those who can afford the advice. This is not a functioning tax; it is a penalty on those who failed to plan.

Stamp Duty Land Tax should likewise be abolished in its entirety. It is a transaction tax on property that suppresses housing mobility, discourages downsizing, and clogs the market at every price threshold where the slab rates change. No serious economist defends it. The revenue — roughly £12 billion a year — is significant, but the drag it imposes on the housing market and on labour mobility is a cost that does not appear in the public accounts but is felt across the economy. People do not move to where the jobs are because the tax on moving is too high. This is a tax that actively makes the country less productive.

VAT should be reformed into a two-rate system: a standard rate and a single reduced rate for a short, tightly defined list of essentials. The present structure — a standard rate at 20%, a reduced rate at 5%, a zero rate on certain goods, and a patchwork of exemptions that turns on distinctions no sensible person would draw — should be swept away.

The boundary between zero-rated and standard-rated goods has produced some of the most absurd outcomes in British tax law. Whether a Jaffa Cake is a cake or a biscuit was the subject of a VAT tribunal in 1991 — the answer determining whether McVitie's owed tax on millions of units. A chocolate digestive is standard-rated; a plain one is not. Takeaway fish and chips served hot attract 20% VAT, but the same food sold cold does not, which has led to fish-and-chip shops experimenting with the temperature at which they hand over the bag. The cumulative effect of these distinctions is a system in which compliance depends less on understanding the law than on memorising its eccentricities.

A reduced rate should apply to food, children's clothing and domestic energy. Everything else — every good and service currently zero-rated, reduced-rated or exempt — should be taxed at the standard rate. The standard rate itself might be reduced modestly to reflect the broadened base. The point is not to raise more from VAT in aggregate but to collect roughly the same amount from a system that is incomparably simpler to administer.

Certain goods impose costs on the public purse — principally on the health service — that are not reflected in their price. Alcohol and tobacco have been taxed on this basis for centuries. Gambling should be taxed on the same basis, openly and without the pretence that the levy exists for any reason other than the social harm the activity causes.

Fuel duty, once road pricing is established, ceases to be a use-tax and becomes a sin tax — a levy on the environmental cost of burning hydrocarbons. It should be reduced substantially but not eliminated, and its purpose should be stated plainly. There is no dishonour in taxing pollution, provided the government is honest about what it is doing and does not dress the tax up as something else.

The line should be drawn firmly here. The state has no business taxing sugar, salt or any other ingredient on the grounds that it knows better than its citizens what they should eat. Sin taxes are justified where an activity imposes a measurable and unavoidable cost on others — the treatment of lung cancer, the policing of alcohol-fuelled disorder, the consequences of gambling addiction. They are not justified as instruments of dietary policy. The government is not a nursemaid.

The current system of funding road infrastructure — through fuel duty and Vehicle Excise Duty — is unsustainable. As the vehicle fleet electrifies, fuel duty receipts will decline and eventually collapse. The Treasury faces a choice between finding a replacement and allowing the road network to deteriorate. A national per-mile charge on all vehicles is the obvious and correct replacement.

The charge should be set at a single national rate — the same pence per mile whether the journey is made on a motorway at dawn or a city street at rush hour. Variable pricing by time, location or road type would be more economically efficient in theory, but the administrative complexity and the surveillance apparatus required to operate it would be considerable. Simplicity should win. Congestion is a local problem and should be managed locally — by councils and mayors with the powers they already possess — not by a national pricing grid that would require every journey in the country to be tracked and categorised.

Vehicle Excise Duty should be abolished once per-mile charging is in place. Fuel duty should be reduced but retained as an environmental levy, set at a level that reflects the pollution cost of burning fuel rather than the cost of using roads. Electric vehicles would pay the per-mile charge but not the fuel duty, which is the correct outcome: they use the roads but do not pollute.

Private expenditure on healthcare, education and pensions should be deductible from taxable income. The logic is straightforward: a parent who pays school fees saves the state the cost of a school place; a patient who pays for private treatment frees a bed and a consultant's time on the NHS; a worker who saves into a private pension reduces the future liability of the state pension system. In each case the citizen is bearing a cost that would otherwise fall on the taxpayer. The tax system should reflect this rather than penalising it.

The present arrangement is perverse. A family that pays for private education — foregoing the state school place to which their child is entitled — receives no recognition for the saving they have made. They pay their taxes in full, funding the school place they do not use, and then pay again from taxed income for the education they have chosen. The same applies to those who pay for private healthcare. Far from being a subsidy to the wealthy, deductibility is simple fairness: an acknowledgement that the citizen has already paid once, through their private expenditure, for something the state would otherwise have had to provide.

Pension contributions already receive tax relief, which is broadly the same principle. The proposal is to extend that logic consistently across the three areas — health, education and pensions — where private provision directly substitutes for state provision, and to do so within a system that is otherwise stripped of reliefs. These deductions are not loopholes. They are the recognition of a genuine economic fact.

Every provision of the tax code — every rate, relief, exemption, allowance and threshold — should be subject to a statutory sunset clause. After a fixed period, each provision expires automatically unless Parliament votes to re-enact it. The period should be long enough to provide certainty for planning purposes — ten years would be reasonable — but short enough to prevent the indefinite accumulation of legislative sediment that characterises the present code.

The tax code grows because it is easier to add than to remove. Every Budget introduces new reliefs, new credits, new targeted incentives for this industry or that behaviour. Almost none are ever repealed. The result, over decades, is a body of legislation so dense that HMRC itself cannot reliably explain all of it, and taxpayers cannot comply with it without professional help. A sunset mechanism reverses the default: provisions that Parliament cannot be bothered to re-enact are provisions the country does not need.

This would also force a periodic public accounting of what the tax system actually contains. At present, Parliament legislates for individual changes without ever confronting the system as a whole. A regular sunset cycle would compel exactly that confrontation — obliging the Treasury to defend, in public, every element of the code it wishes to retain. Some provisions would sail through. Others would quietly be allowed to lapse, having outlived whatever purpose they once served. This is not radical; it is maintenance.

The government should be placed under a statutory duty to publish, in every Budget, the total tax burden as a percentage of GDP — and to explain, in terms that a citizen without specialist knowledge can understand, why that figure has changed since the previous year. This is not a constraint on policy. It is a constraint on evasion: the evasion practised not by taxpayers but by Chancellors, who have for decades raised the tax burden by stealth while insisting that they have not raised taxes.

The most effective method of stealth taxation is the freezing of thresholds. When the personal allowance or a rate threshold is held constant while wages rise with inflation, more people are dragged into higher rates without any legislation being required. The Chancellor does not need to stand at the dispatch box and announce a tax increase; he merely needs to say nothing, and inflation does the work for him. This practice — fiscal drag — has been used by governments of both parties and should be ended by statute.

All tax bands, allowances and thresholds should increase automatically in line with consumer price inflation each year. If a government wishes to freeze or reduce a threshold in real terms, it should be required to legislate for that change explicitly — to stand before Parliament and say plainly that it is raising taxes, rather than achieving the same result by administrative inaction. The principle is simple: if the state wishes to take more, it should have to ask.

A radically simpler tax code requires a radically smaller tax authority. HMRC currently employs some 66,000 people to administer a system of such complexity that even they struggle with it — as any taxpayer who has tried to get a consistent answer from the helpline can attest. A flat-rate income tax, a flat-rate corporate tax, a two-rate VAT and a handful of duties could be administered by a fraction of that workforce.

For the vast majority of employees — those with a single employer and no significant investment income — the tax system should be invisible. Their employer deducts the tax; the correct amount arrives in their account; and they never need to file a return, ring a helpline or engage an accountant. Self-assessment, which currently requires millions of people to perform calculations that their employer's payroll software could handle automatically, should be confined to the genuinely self-employed and those with complex affairs. For everyone else, tax should be something that happens in the background, correctly and without fuss.

Real-time digital tax accounts — in which every taxpayer can see exactly what has been deducted, what they owe and what they have paid — should replace the current system of annual returns and opaque coding notices. The technology to do this is not speculative; it exists and is already partially implemented. What is lacking is the simplicity of the underlying code. No amount of digital infrastructure can make a 22,000-page tax code easy to administer. Simplify the code and the technology becomes trivial.