Radical changes to taxation system proposed by IFS

According to a new report from the Institute for Fiscal Studies (IFS) – Tax by Design – the current tax system is "inefficient, overly complex and frequently unfair". It calls for some radical changes to taxation policy, warning that failure to do so could result in “enduring costs” for the economy. The report constitutes one of the most significant pieces of analysis of the UK tax system in over 30 years.

Proposed measures include the abolition of stamp duty land tax (SDLT), to be replaced with a reformed council tax system. SDLT is currently charged on all land transactions in the UK, including freehold sales and the grant or assignment of a lease.

Sir James Mirrlees, a Nobel laureate who led the review, also suggested that interest earned by standard bank and building society accounts should no longer be taxed. Instead, only larger than normal returns on more risky corporate investments should be targeted.

The IFS report goes on to recommend merging income tax with national insurance contributions (NICs). It notes that “National Insurance is not a true social insurance scheme; it is just another tax on earnings, and the current system invites politicians to play games with NICs without acknowledging that these are essentially part of the taxation of labour income. The two systems need to be merged.”

The review also criticises the existing system of inheritance tax (IHT), branding it as “something of a mess”. Although it does not propose its abolition, the Institute argues that a “lifetime wealth transfer tax” should be introduced, in order to reduce the possibilities for the avoidance of liabilities.

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