IGP Stories

Tax Reform for the 21st century

Andrew Percy

17 December 2021

On the 110th anniversary of National Insurance, the IGP is releasing its report on National Contributions. The report calls for the modernisation of the UK’s tax system to fund levelling-up and Net Zero without relying on taxes on wages.

The existing tax system is not fit for purpose and cannot raise the revenues needed for social care, levelling-up, or climate change. Hard-working families will see the taxes on their wages at the highest level since the 1980s, after the government raises NICs by 1.25% in March 2022. And tax rates on wages are already more than double the rates on unearned, passive incomes.

The National Contributions report shows that the UK can afford to level-up and fund Net Zero without raising the needed funds from taxes on wages. The detailed modelling in the report demonstrates how taxing all forms of income equally, both active and passive, could generate £44 billion a year.

Before the challenge of Net Zero can be properly tackled, advanced countries, like the UK, will have to do more to address the widespread insecurity of many people’s livelihoods. So, the National Contributions report presents a pathway to Net Zero that passes through two stages. First, Modernising the tax system to make it fairer. Then, a period of Building the universal basic services that will secure livelihoods by driving down the cost of living.

Only after both taxes and public services reformed, so that the contributions citizens make through the tax system are clearly and directly connected to the public services that make their lives more secure, can societies expect to make meaningful progress on their Net Zero transitions. The degree of behaviour change that will be needed will require that everyone feels truly in it together.

In the Build scenario, the report models the tax changes that would require to fund an updated set of the Universal Basic Services that the IGP called for in their 2017 report. Adding 1.5 million housing units, which are provided for social rents. Doubling bus services and making them free to ride. Providing everyone with basic Internet access. And strengthening local communities with food programmes and new democratic assemblies in every constituency to design and run local services. These services are budgeted at £33 billion a year but not require any additional taxes on wages for 98% of taxpayers.

This report is the first to investigate the simplification of the tax system that has been called for by the government’s own Office for Tax Simplification, and major think tanks, in recent years. A single tax, combining Income Tax, National Insurance, Capital Gains and Inheritance Tax, applied equally to all forms of income, using the same rates and allowances, is the modern tax system that advanced countries need to meet the challenges of the coming decade. The report calls this a PRoFI tax system: Progressive Rates on Flat Incomes. The design of the system connects everyone to the progress of the economy, so that if people’s incomes don’t go up as fast as others, then their taxes automatically fall.

The National Contributions report shows how a modern, fair tax system would work in the UK.

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