IFS: UK tax system needs overhaul to support recovery Britain?s tax system is in dire need of overhaul so it supports the economic recovery, according to the Institute for Fiscal Studies (IFS).
By Emma Rowley 2:52PM GMT 10 Nov 2010 Daily Telegraph
The unnecessarily complex system discourages equity finance in favour of corporate debt, Nobel-winning economist Sir James Mirrlees found in his review for the think tank.
The report called for an allowance for corporate equity to be introduced into corporation tax, so that equity- and debt-financed investments are treated equally. The reform could boost national income by 1.4pc, or more than £20bn, it was argued.
The report also criticised corporation tax as not properly integrated with personal taxes, creating ?opportunities for avoidance?.
It called for the tax treatment of income from employment, self- employment and corporate sources to be aligned.
In addition, business rates were attacked as contravening ?one of the most basic tenets of good tax design?, by creating a bias against property-intensive production and discouraging development.
Meanwhile recent changes to two separate taxes on earnings ? income tax and National Insurance contributions (NICs) ? present workers with a ?bizarre? tax structure, the review found.
Marginal income tax rates rise from 40pc to 60pc on incomes between £100,000 and £112,950, then fall back to 40pc before rising again to
50pc, it said.The report also called for a single integrated benefit to replace all or most of current benefits.
"UK system falls short of the ideal in costly and inequitable ways. It discourages saving and investment, and distorts the form they take,? Sir James said.
?Some of the recommended reforms involve tweaks to current policy; others involve radical change, and are probably for the longer term.
It is undeniable that some of the proposed changes would be politically difficult. But failure to reform imposes enduring costs."
A Treasury spokesman said the Government would consider the findings of the review, which made an "important contribution" to the long-term debate on the tax and welfare system in the UK.
?The Government has already set out steps to simplify the tax and benefits system by setting up the Office of Tax Simplification, and is consulting on reforms to improve the tax policy-making process, as well as undertaking fundamental reforms to the welfare system, including the introduction of a universal credit," he said.