Mirrlees Review of Taxation

[John Short]

Incredible amount of material on taxation to be found in Mirrlees Review of Taxation with wide methodological appeal.  The Review set out to identify the characteristics of a good tax system for the 21st century, to assess the extent to which the UK tax system conforms to those ideals, and to recommend how it might realistically be reformed in that direction.  It has been carried out by a group of top experts under the chairmanship of Nobel laureate Sir James Mirrlees.

http://www.ifs.org.uk/mirrleesReview/dimensions
http://www.ifs.org.uk/mirrleesReview/design
http://www.ifs.org.uk/mirrleesreview/pamphlet.pdf

[petagny]

I see what you mean. The 'Dimensions of Tax Design' really is a rich source of reference material by some top-notch thinkers!

[stewm]

See also Australia's major tax review, released May 2010, by a Panel with Treasury assistance and covering taxes, transfers, design and process, federal and state, resource taxation, user charges... some would say its too big. But there is some good stuff there.  http://www.taxreview.treasury.gov.au .

[John Short]

This is very interesting and perhaps needs much more time to compare the different approaches (if any!) between the two reviews.  A few statements caught my eye in reading the Executive Summary which leads me to ask – have too many countries tried too much to use tax policy as a vehicle for economic and social engineering rather than to raise revenue to fund public expenditure  efficiently and effectively without causing too many distortions?  Are there too many tax expenditures rather than targeted public expenditure, or too much interference in the economy via the tax system?  (See the Country Board Éirinn go Brách re Ireland as well, relating to this issue).

Quotes:

“The aim is to create a tax structure that will position Australia to deal with its social, economic and environmental challenges and enhance economic, social and environmental wellbeing.”
No mention of revenue!

“Australia has too many taxes and too many complicated ways of delivering multiple policy objectives through the tax and transfer systems. The capacity of the legislative and operating platforms of these systems, and their human users, to deal with the resulting complexity has been overreached. The tax and transfer architecture is overburdened and beginning to fail in dealing efficiently and effectively with multiplying policy goals and demands. Rationalisation of the tax and transfer architecture should now be a strategic priority.”
No need to comment!

“In time, citizens should be able to access, through a suitable choice of channels, comprehensive and timely information on their tax and transfer affairs, and be able to see and interpret how their tax and transfer outcomes have arisen and may be affected by choices they may make.”
Surely this is a fundamental aspect of tax administration and policy? How would Australian score on PEFA PI-13 (i) and (ii) given this statement?
Have Governments and policy makers become too imbued with a false appreciation of their own ability re managing an economy?

[marybetley]

Jim Mirrlees was one of my lecturers - now, there's a scarily intelligent guy (actually, he had a pretty formidable reputation all-around)!

[John Short]

The Mirrlees Review of tax system has now been published.  From the IFS Press release
"In the deepest and most far reaching analysis of the UK tax system in
more than 30 years, the Mirrlees Review puts the case for radical tax
reform. It shows how the current system is inefficient, overly complex and
frequently unfair. And it sets out a range of proposals designed to
increase output and welfare.
Government, through the tax system, takes around £4 in every £10
earned in the economy. It is not surprising that getting tax design wrong
can be hugely costly. Yet the level and quality of debate on tax policy is
inadequate; there has rarely been any clear sense of direction from
governments; and expensive and damaging mistakes have been all too
common.
In the UK poor tax design contributes to an inefficient housing market,
distortionary taxation of financial services, excessive reliance on debt
finance, employment levels lower than they need be and distorted and
inefficient savings and investment decisions. The review sets out a long
term strategy for reform, and in doing so speaks to immediate policy
priorities."

http://www.ifs.org.uk/pr/mirrlees_sept11.pdf

Interestingly, much of the UK press coverage relating to the publication of the report has centred on the 50% marginal tax rate with headlines of "50p top tax rate 'won't raise any extra revenue' warns influential think tank" Read more: http://www.dailymail.co.uk/news/article-2036148/50p-tax-rate-wont-raise-extra-revenue-warns-Institute-Fiscal-Studies  though the Guardian focuses more on expenditure "George Osborne given stark warning on cuts' impact -Institute for Fiscal Studies says chancellor's plan will cause 10% drop in family living standards" with reference  to a different report.  (The IFS analysis is included in The Great Recession and the Distribution of Income, published on Monday (12 Sept) by the London School of Economics. http://www.ifs.org.uk/pr/frdb_recession.pdf
Full Taxation reports
http://www.ifs.org.uk/mirrleesReview/design
http://www.ifs.org.uk/mirrleesReview/dimensions

[harnett]

"Britain (has) one of the most irrational and unfit-for-purpose tax systems in the world," states Will Hutton in the Observer today, who is suggesting that the Mirrlees review of taxation should be acted upon in the forthcoming budget in the UK.

http://www.guardian.co.uk/commentisfree/2012/mar/11/will-hutton-budget-osborne-tax

Of course we'd all have our views on the particularities of reform - I'm most interested in whether the National Insurance contribution should be scrapped or not.  In its present form it appears to be no more than another form of income tax (and therefore should be treated as such), but there are those like Mr. Hutton who would like to see its original purpose, social insurance, made explicit in the taxation regime.

Certainly food for thought.  And almost certainly will be ignored in the budget.  Anybody out there with any comments?

[John Short]

The debate in the UK by the politicians is confused as they do not want to tackle the real problems directly.  We have part of the coalition advocating a tycoon tax and a mansion tax to ensure that those who lower their taxes by employing smart accountants to reduce their tax bill by exploiting loopholes pay their "fair" share of taxes.  Surely the solution is to close the loopholes and simplifying the system?  A tax free lump sum and only deductable pension contributions - which is deferred tax payment anyway, may do that. 

Yesterday's FT page 4 refers to a Report by Lord Lawson (wonder where he gets the time!) that a transferable allowance for married couples (definition needed here) with children would be far more effective in helping families on middle or low incomes that raising the personal tax allowance to £10,000 as advocated.  The Institute of Fiscal Studies also looks at the £10,000 threshold proposal and assesses the cost and also concludes "But if we examine the distributional impact at the family level (which is normal for this sort of analysis, since we would expect at least some degree of income sharing within families) we get a different pattern to the one we might expect. This arises because two-earner couples, who tend to have higher family incomes, can benefit twice over from the increase in the personal allowance because both members of the couple would see their income tax liabilities fall by £379, meaning that they would gain £758 in total. Thus, the highest average cash gain occurs in the second-richest tenth of the income distribution (some of the richest tenth would not benefit because of the withdrawal of the personal allowance above £100,000, lowering the average gain for this group). As a percentage of income, the gain is roughly the same from just below the middle to just below the top of the income distribution, with the bottom and the very top gaining by less than this. To summarise, the common assertion that increasing the personal allowance is progressive is true if one considers the gains across individual income taxpayers. It is not true if one considers the gains across all families as relatively few of the poorest families contain a taxpayer and two-earner couples gain twice as much in cash terms as one-earner families."
http://www.ifs.org.uk/publications/6045
http://www.care.org.uk/public-affairs-news/press-release-uk-tax-system-tightens-the-screw-on-squeezed-middle
So if the overall policy is to take the low paid out of the tax net and make the rich pay their share get rid of loopholes and target the tax system in a specific way.  Simple!
 With regards to National Insurance - there has been discussion on this topic elsewhereon the Board .  Petagny raises the issue of NI on employers’ contribution being liable to exploitation which certainly would need to be addressed if it were to be combined with corporate tax and employees’ contribution combined with income tax.  The link between the NI and health and pensions has certainly been broken so abolishing NI would appear to be justified.

Simplify tax: remove loopholes, tax surpluses (wherever from) and tax consumption (VAT and Excises) - wonder what that would do for the incentive system?