Dated: 10 November 2010

Commenting on the Mirrlees Review: Reforming the tax system for the 21st century published today, Richard Baron, Head of Taxation at the Institute of Directors, said:

“The aim set out in the Review, to raise the necessary revenue with minimal economic and administrative inefficiency, is the right one. But there is also a marked emphasis on progressivity. Some progressivity is justified, but there comes a point at which disincentive effects curtail growth and harm the poor. We do not see sufficient recognition of this danger in the Review.

“Work incentives for people at different stages of life and in different family circumstances are discussed, but we do not see enough attention in the Review being paid to the need to retain highly skilled and highly mobile staff in the UK.”

Some specific comments on the Review

On neutrality

• We welcome the emphasis on neutrality. Economically similar transactions should be taxed in similar ways. But it will be very difficult politically to get there from where we are now in a reasonable period of time. The suggested merger of income tax and national insurance is the most obvious example.

On savings

• We agree that small-scale exemptions such as ISAs should continue. ISAs in particular have been a big success story. We are not convinced that special incentives for pension saving should be added on top of EET or equivalent, as the Review suggests.

• The idea that a normal (risk-free) rate of return on non-exempt savings should be exempt is worth consideration, but we have very great doubts about the idea of a tax on lifetime wealth transfers. Inheritance tax is very often additional taxation of amounts already taxed. Its abolition would be better than its extension.

On corporate taxes

• We agree that the rate of income tax on dividends should be adjusted to take account of the burden of corporation tax. But the allowance for corporate equity, within the company, is more challenging. The review recognizes, and we agree, that it would be foolish to pay for this by increasing the corporation tax rate: international tax competition rules this out. So we would need to think about how to make the books balance. The Review suggests tax increases elsewhere. We would rather see long-term strict control of public spending so that tax revenues can be a diminishing proportion of GDP.

Points of particular concern for small businesses

• The proposals on national insurance, which would hit the self-employed, and the proposal to have a single corporate tax rate with no small profits rate. The arguments for change may be theoretically strong, but the proposals would have to be tested for their impact on real small businesses. The allowance for corporate equity might well not provide satisfactory compensation.

• Property-intensive businesses will want to look at the detail of any land value tax that might replace business rates. It would redistribute burdens, and any transition would have to be gentle.

Some general remarks

• The Review acknowledges and sets out in some detail the challenges of transition. This is useful. The most helpful next step would be detailed responses from both Government and Opposition. That would give a much better sense of which proposals are politically practical.

The Review can be viewed here: http://www.ifs.org.uk/mirrleesReview