Mirrlees review: taking tax to task

Tax return form19 September 2011

Reforming Council Tax, dropping the National Insurance, simplifying the benefits system and replacing VAT are among the suggestions from the Mirrlees Review on tax reform.

The tax system "could raise as much revenue and achieve as much redistribution as it currently does in far less costly ways," comments Sir James Mirrlees.

The review, which was set up to assess the UK tax system and how it compares with an optimal system of taxation, has published its findings in the report Tax by Design. It lists a number of recommendations, including:

  • Reforming council tax and abolishing stamp duty: While stamp duty is characterised as "among the most inefficient and damaging of all taxes", the review suggests reforming council tax to bring payments in line with up-to-date values and fully proportional to house value.
  • Integrating income tax and National Insurance: The National Insurance is deemed as "no longer serving any purpose", and is recommended integrated into income tax.
  • Replacing VAT, which is "needlessly complex and inefficient". Instead a VAT equivalent should be introduced, extending to nearly all spending, and extra tax revenue used to reduce income tax and raise benefits.
  • Simplifying the benefits system: The current system is "not integrated and reduces incentives to work and earn much more than is necessary", according to the review, which welcomes the government proposals for a Universal Credit.
  • Replacing fuel duty with congestion charge: While more fuel-efficient cars mean less tax revenue, the fuel duty does not address traffic congestion – "the main cost of driving". Congestion charging is recommended to replace most of the fuel duty.
  • Reforming savings tax: The review criticises "hugely different effective tax rates" which are poorly designed for some savings and disincentives for others.

"The Review shows that the UK system imposes unnecessary costs on the economy," Sir James Mirrlees said in a press release from the Institute for Fiscal Studies.

"We propose a clear long-term vision and direction of reform. While some of the reforms we recommend involve tweaks to current policy, others involve change which is radical and is for the longer term."