Fuel taxes and stamp duty must go, says think tank
Stamp duty and fuel tax should be abolished in a bid to radically overhaul the tax system, according to an influential think tank.
The Institute of Fiscal Studies (IFS) is calling for several major changes to the UK tax system, including getting rid of stamp duty in favour of a vast increase in council tax, and a new congestion charging system to replace fuel duties.
Publishing the results of its five-year investigation into the UK tax system, the IFS brands the current regime "inefficient, overly complex and frequently unfair".
At present, the government takes about £4 in taxes of every £10 earned. But the system "could raise as much revenue and achieve as much redistribution as it currently does in far less costly ways," says Nobel Prize-winning economist Sir James Mirrlees, who led the review.
So if these recommendations were introduced how would they affect you?
• Council tax would go through the roof. At present, council tax is calculated based on the value of your house in 1991. The IFS wants the valuations brought up-to-date, which would lead to a massive rise in council tax.
• The cost of buying a house would drop. The review calls for stamp duty to be abolished in order to increase transactions in the housing markets.
• Petrol would get cheaper. The IFS wants the government to develop a comprehensive system of congestion charging to replace fuel duty. This is because increasing fuel efficiency combined with the growing popularity of electric cars will reduce tax revenues from petrol and diesel taxes.
• Your savings would grow faster as taxes on cash savings would be abolished.
• Taxes on earnings would be simplified with national insurance and income tax combined into one tax. The government has stated that this is already being considered.
• The price of your shopping would increase as the IFS believes VAT should be expanded to cover all products – at present items such as food, children's clothing and books are exempt.
The IFS has pointed out that it doesn't expect its proposals to be introduced immediately.
"We are not proposing that this is the content of George Osborne's next Budget," says Paul Johnson, director of the IFS.
Instead, the IFS hopes the report will form the framework for tax policy over the next 10 to 20 years.
Invented by a Frenchman in 1954 and ironically introduced in the UK on 1 April 1973, VAT is an indirect tax levied on the value added in the production of goods and services, from primary production to final consumption and is paid by the buyer. Its levying is complex, with a number of exemptions and exclusions. For example, in the UK, VAT is payable on chocolate-covered biscuits, but not on chocolate-covered cakes and the non-VAT status of McVitie’s Jaffa Cakes was challenged in a UK court case to determine whether Jaffa Cake was a cake or a biscuit. The judge ruled that the Jaffa Cake is a cake, McVitie’s won the case and VAT is not paid on Jaffa Cakes in the UK.
A hugely unpopular tax paid on property and share purchases. Stamp duty on property is levied at 1% for purchases over £125,000 (£250,000 for first-time buyers) which then moves up at a tiered rate. For property between £125k and £250k you pay 1%, then 3% from £250k up to £500k and then 4% from £500k to £1m and then 5% for properties over £1m. But unlike income tax, which is “tiered” and different rates kick in at different levels, stamp duty is a “slab” tax where you pay the rate on the whole purchase price of the property. On shares, stamp duty is charged at a flat rate of 0.5% on all share purchases. Figures correct as of May 2011.
A scheme originally established in 1944 to provide protection against sickness and unemployment as well as helping fund the National Health Service (NHS) and state benefits. NI contributions are compulsory and based on a person’s earnings above a certain threshold. There are several classes of NI, but which one an individual pays depends on whether they are employed, self-employed, unemployed or an employer. Payment of Class 1 contributions by employees gives them entitlement to the basic state pension, the additional state pension, jobseeker’s allowance, employment and support allowance, maternity allowance and bereavement benefits. From April 2016, to qualify for the full state pension, individuals will need 35 years’ of NI contributions.