Reform UK taxes to make system more efficient, says think tank

The government needs to reform UK taxes to make the system more streamlined and economically efficient, says a think tank.

In their latest briefing, the Institute of Economic Affairs (IEA) call for the United Kingdom government to overhaul capital gains taxes, land and property taxes, and inheritance tax.

The IEA say the government should replace council tax and stamp duty with an annual tax that is a fixed percentage of the property’s value. Image: pixabay-1239420

The pro-free-market economics think thank says such a reform of UK taxes should be the aim of any government that “wishes to promote simplicity and economic efficiency.”

The IEA urge the UK government to abolish capital gains tax, stamp duty, council tax, business rates, and inheritance tax and replace them with more practical alternatives.

Capital gains tax is a ‘double tax’

The IEA argue that because it taxes anticipated profits and retained profits that are also taxed elsewhere in the system, capital gains tax is more of a double tax when applied to investments in company shares.

Also, capital gains tax does not raise much revenue, and higher rates tend to discourage investment, encourage tax avoidance, and dampen entrepreneurship, the organization says.

If capital gains tax is not abolished, then the IEA say the government should reintroduce price indexation allowance so investors are not taxed on “illusory gains.”

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Inheritance tax ‘favours consumption over investment’

Moving onto inheritance tax, the IEA point out that taxes on estates that people leave when they die are also a form of double taxation – tax is paid once accumulated income as savings, and then again at death.

Such an inheritance tax system favours consumption over investment, and taxpayers “go to great lengths to avoid paying it,” they note.

If the government is unwilling to follow the example of several developed countries and do away with inheritance tax altogether, then they should change the system so people who inherit money or receive large gifts should be taxed on these in the same way as they are taxed on other types of income, argues the think tank.

Such a system could tax large gifts at a lower rate closer to 20 percent, over a lifetime tax-free limit of say £500,000. This would lessen the burden on estates that are shared out more widely and reduce the incentive for avoidance.

Land and property taxes ‘extraordinarily inefficient’

The IEA describe the UK’s land and property taxes as “extraordinarily inefficient,” despite their high rates. They suggest stamp duty makes it harder for people to move home: it reduces labour mobility and increases the cost of downsizing, for example.

Also, the stamp duty system is over-complicated; it is governed by about ten sets of rules depending on nature of ownership and property value. And yet, just 20 years ago, the duty was either zero or a rate determined by one set of rules.

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In further comments on property taxes, the IEA describe council tax as “regressive” and argue that business rates put people off investing in business property.

The think tank says the government should abolish stamp duty, council tax, and business rates and instead bring in a less economically harmful property tax system that is phased in over 5-10 years.

For example, it suggests replacing council tax and stamp duty with an annual property-based tax that is a fixed percentage of the property’s value, up to a maximum of 1 percent. Such a system would also levy substantial charges on foreign owners of UK property who do not live in the UK.

Professor Philip Booth, Academic Fellow at the Institute of Economic Affairs, says changing these three groups of taxes would streamline the tax system and make it more economically efficient.

“The changes would be largely self-contained,” he notes, adding that implementing the proposals would not only radically reform UK taxes, but would also hugely improve the tax system as a whole.