Written evidence submitted by Oxfam GB

 

  1. Oxfam GB welcomes the tax after coronavirus inquiry. It is sensible that the committee reviews options for fundamental changes to the UK tax system. Oxfam agrees that in addition to the immediate pressures to identify revenues to address the record budget deficit and growing national debt, there are longer-term trends that merit a review of tax policy. Oxfam thinks that governments should rely more on progressive taxes which tackle economic inequalities directly.

 

  1. Given the very high levels of wealth inequality in the UK, and the relatively low contribution wealth taxes currently make to revenues overall, Oxfam recommends a comprehensive review of all wealth taxes. Oxfam agrees with the general principle that income from labour should not be taxed at a higher rate than income from wealth. Oxfam also recommends that the government considers a net wealth tax as part of a comprehensive review of wealth taxation.

 

  1. Oxfam remains concerned that the patchy changes to corporate income tax within the UK and internationally mean some companies continue to avoid paying their fair share. We recommend the UK works with other governments to agree a holistic package which should include a minimum effective tax rate for companies, as well as mandatory public reporting of key tax-related data. The UK can introduce some changes unilaterally. Oxfam recommends the government considers a short-term ‘excess profits tax’ as one option to tackle inequality and raise revenue.

 

  1. Some companies are also beneficiaries of tax incentives. Oxfam recommends a thorough review of all tax incentives to check that economic and social gains are demonstrably attained. Reducing the number and complexity of incentives will help simplify the tax system. It is very important that the government engages stakeholders – parliament, taxpayers, citizens and others – in a constructive and open public debate about tax. Whilst there is growing recognition that taxes will need to rise, too many of us think someone else should be paying.

 

What are the major long-term pressures on the tax system in the UK, including those arising from changes in working practices, demographics, the environment and other factors? How are these affecting the efficiency of the tax base and the overall level of demand for public services?

  1. One of the long-term pressures on the UK tax system is the relative decrease in income from formal employment due to the rise of self-employment, which means there is a more brittle tax base. This trend exacerbates certain inequities and anomalies in the tax system such as who pays national insurance (workers and employers). It is also important to consider the long-term trend of growing wealth inequality which we discuss below as a key reason to tax wealth more effectively. 

 

What more can the UK do to protect its tax base from erosion as a result of globalisation and technological change, and what further impacts will the coronavirus pandemic have on our tax base?

  1. One of most obvious areas in which the UK can protect its tax base from erosion as a result of globalisation and technological change is by cooperating with other countries to secure a new generation of global corporate tax rules. Although the current OECD-led 'BEPS 2' negotiations offer the prospect of some new rules on corporate tax for multinational corporations, any agreement is likely to be complex and deliver reasonably small gains to countries such as the UK and developing countries alike. Oxfam welcomes the prospect of a globally agreed minimum effective tax rate as proposed under ‘Pillar 2’ of the negotiations though the rate, the relevant tax base, and the associated taxing rights (rule order etc) need to be scrutinised to ensure fairness between countries. Oxfam remains concerned that the proposed reforms under ‘Pillar 1’ about taxing rights where no physical presence of a multinational corporation is evident are overly complex with little increase in tax revenue likely.

 

  1. Until any agreement is reached in the ‘BEPS 2’ negotiations, it is reasonable for countries including the UK to implement unilateral measures to stem corporate tax avoidance and very low effective corporate tax rates. The UK’s Digital Services Tax is one such example. It is a sub-optimal tax and should be rescinded in the event of a comprehensive international deal which obviates the need for such piecemeal measures. In the context of the pandemic, the UK government should consider whether short-term ‘excess profits’ taxes are appropriate to raise revenue in a fair way from those companies who have been able to generate super profits in recent times whilst many other companies have struggled to stay afloat.

 

  1. The UK government should live up to its rhetoric as a champion of corporate tax transparency, either securing agreement with like-minded countries to mandate the publication of key tax-related data by large multinational companies, or implement the requirement in the UK. Precedents in the banking and extractives sectors, and from an increasing number of companies, have shown that arguments against such transparency are spurious. The key is to have consistent requirements. Oxfam recommends government use the standard published by the Global Reporting Initiative in the absence of one agreed at the OECD or similar international organisation.

 

  1. In the longer term, the government should publish a new ‘roadmap’ for taxes on corporations, including but not limited to corporate tax. The roadmap should set out how corporations should be expected to be taxed, the principles underlying the suite of specific taxes pertaining to the corporate sector, how simplification can be achieved, tax transparency of corporates’ tax affairs, the role taxes from corporates can play in contributing to government revenues and addressing social inequalities, the use of corporate tax incentives, and the way in which the UK government will further its aims through further international, multilateral agreements. Oxfam recommends that such a roadmap includes a minimum corporate tax rate, and a minimum corporate effective tax rate applicable to domestic and multinational corporations alike. 

 

Do these pressures need to be met with tax reform, and if so, is this the right time for reform?

  1. The current pandemic context has been met with significant additional government spending with a record deficit predicted for 2020/21. The UK’s debt/GDP now exceeds 100% and is expected to peak higher. Even before the pandemic, there was a persistent deficit. At the same time, further cuts to public services have been largely ruled out. Despite borrowing costs at record lows, it is clear that fiscal policy will involve important tax rises in the medium term. Economically, it is not the right time to raise most taxes but the medium-term intention to do so needs to be made by the government. There is a political consensus that taxes will need to rise to pay for more public services and to reduce the deficit.

 

  1. This is the right time for government to set out the principles of broad tax reform. These should include taxing labour and wealth at the same rates (equalising capital gains tax rates with income tax rates); ensuring existing tax rates and policies are reformed so that the wealthiest do not have a lower overall effective tax rate on their income and wealth than the poorest; taxing carbon effectively; implementing a minimum effective corporate tax rate; taxing wealth in a holistic and consistent way; addressing horizontal inequalities through better designed taxes tackling inter-generational disparities.

 

  1. Following the outline of such principles, the Treasury select committee could provide a forum for analysing expert recommendations on the specific elements of tax reform that together would correspond to the principles and provide options to government for future tax changes grounded in cross-party analysis.

 

What overall level of taxation can the economy bear without undesirable or counterproductive harm to economic growth?

  1. There is not a single, simple level of tax at which the economy tips into recession. Evidence from different countries, especially in northern Europe, over different periods of time bears this out. There are many variables which affect the overall growth of the economy (itself an indicator which is at best simplistic and at worse dangerous). The tax/GDP ratio is unlikely to be static and the overall impact of the tax take on the economy is likely to depend more on the constituent taxes rather than the overall ratio. More important to economic growth (or better economic indicators) will be the level of productivity, a highly skilled workforce, good infrastructure, sound trade and other international agreements etc.

 

  1. A better analysis of the tax take would identify 'tax effort' and tax buoyancy, particularly in unproductive sectors or assets. For example, taxing wealth systematically encourages its owners to ensure it is put to productive use and to incentivise returns to labour over capital accumulation. Similarly, taxing carbon more heavily than clean sectors will encourage a quicker and more comprehensive transition to net zero.   

 

Which areas of the tax system are most in need of reform, and which are best left alone?

  1. The UK’s patchy system of wealth taxes needs reform. Wealth inequality has risen recently and is much higher than the already high levels of income inequality. Some taxes on wealth – such as Council Tax – are regressive, penalising those on lower incomes with little wealth compared to those with high levels of wealth. Other wealth taxes such as inheritance tax are poorly understood and the very rich can avoid many liabilities which some other taxpayers end up paying. The different rates of capital gains tax incentivise some professions to take earnings in non-income forms so they can pay lower rates of tax. Oxfam recommends that the committee either provides comprehensive proposals on reforming wealth taxation in a holistic way for the government to act on, or launches a follow-up inquiry to address the disparity in tax treatment between wealth and income from labour.

 

  1. It is important to articulate the difference between wealth taxes in general and a net wealth tax specifically. Evidence shows that – in common with many other countries – the UK does not tax individual and household wealth effectively, generating around 4% of GDP in revenues, compared to 15% from taxes on income and 11% from taxes on consumption. We also think that the rise in wealth inequality in recent years points towards a need for higher taxing of those with very high wealth. As part of a comprehensive review of wealth taxes, Oxfam recommends the government considers two specific proposals: 1. Equalising capital gains tax rates with income tax rates; and 2. Analysing whether a net wealth tax should be introduced in the UK. Others have shown how reforms to other wealth taxes such as Council Tax, Inheritance Tax and Stamp Duty could be made, either to make them fairer and/or to raise more revenue.

 

  1. Oxfam first recommended the government consider these two changes to wealth taxes in the UK one year ago. We endorse the IPPR analysis showing the potential revenue gains from equalising capital gains tax rates with income tax rates. This would simplify the tax system and the burden of relative tax rises would fall almost wholly on the very rich, some of whom would just have less opportunity (or incentive) to take earnings as capital gains rather than as income.

 

  1. Oxfam prioritises comprehensive reform of wealth taxes over the introduction of a net wealth tax. The current extremely high deficit lends credence to the idea of doing both. Oxfam supports the work being carried out by the ‘UK wealth tax’ commission which is due to report in December. In our more limited research, we estimated that were a net wealth tax introduced on the basis of the model applied in Spain (on assets over around £750,000 not taking into account an average property value or pensions), such a tax could raise around £10bn annually, the vast majority of which would be paid by those in top 1% of income.

 

What reforms should be considered in response to the pressures on the tax system?

  1. To ensure the principle of fairness in the tax system is upheld and to deal with the current particular pressures on the tax system, the government should consider implementing a minimum (or alternative) effective tax rate for individuals and companies on their net income or profit. Combined with measures to treat different forms of income (whether from labour or capital) the same, this would help simplify the tax system, increase revenues and be a clear way to make the tax system fairer. To make the principle of a minimum effective tax rate fairer it would be preferable to consider the impacts of indirect as well as direct taxes paid by individuals and companies since evidence shows that indirect taxes make up a much greater proportion of poorer people’s expenditures than for those with high incomes or wealth.

 

What is the role of tax reliefs in rebuilding the economy and promoting economic growth and efficiency? Does the current regime of tax reliefs perform this role well?

  1. There needs to be a thorough review of all tax reliefs since the government foregoes so much money through them and it is often unclear whether they have the intended effects. Rationalising tax reliefs is one big area where the government can reduce expenditures, potentially meaning fewer or lower tax rises in other areas.

 

  1. Companies and individuals tend to be more likely to invest in a country through the presence of deeper attributes such as good infrastructure, education and training, certainty in business activities particularly when making investment decisions. Some tax reliefs may be needed to reach wider objectives such as the transition to a net zero carbon economy, but these should only be used in the context of a clear policy framework. For example, it is more important to mandate an early deadline for stopping the sale of petrol and diesel vehicles than it is to provide reliefs to companies selling electric cars or customers buying them. The policy framework will do much of the ‘heavy lifting’ in incentivising behaviour more effectively than reliefs will do.

 

What are the areas for simplification?

  1. As mentioned above, equalising capital gains taxes with income taxes would simplify the tax system as well as meeting other objectives of increasing fairness, reducing opportunities for ‘gaming the system’ and increasing revenue.

 

  1. Oxfam tends to be concerned about hypothecation of taxes because rather than increasing simplicity (£x specific tax take is spent on £y specific programme), it tends to increase complexity in administration and encourages fragmentation across revenues and expenditure. There is also a danger that a contributory principle is reinforced whereby only relevant taxpayers are seen as paying for a certain service. This is disingenuous since in reality nearly all taxes are collected centrally and expenditure disbursed from the centre. Oxfam is wary of reinforcing a contributory principle particularly in relation to essential services which are provided by government irrespective of an individual’s tax payments. 

 

  1. Whilst we recognise the usefulness of highlighting how money revenue may be raised from a particular measure and how such a sum can be spent by government, it is important that governments decide on collective plans outlining how to raise revenue and spend public money. Therefore, we urge caution in the important debate about using a particular new tax, for example on workers over the age of 40, to specifically pay for government funding of social care.

 

Is there a role for windfall taxes in the post coronavirus world?

  1. Economically, windfall taxes should target excess or ‘super-normal’ profits or returns. Such taxes make sense in a context where a recession is affecting most sectors and thus general tax rises are economically unhelpful. Given the high pre-existing levels of inequality and the differentiated impacts of the coronavirus crisis, it makes sense to examine options for windfall taxes. Oxfam recommends looking at options including: a) an excess profits tax; b) a revamped digital sales tax; c) a carbon tax (which could become a permanent feature); d) a net wealth tax (which could become a permanent feature – though some have argued for a high, one-off wealth tax).  

 

  1. Oxfam has outlined principles for an excess profits tax which could be applied in the UK. Given the context of the pandemic, there is a clear fairness rationale for higher taxes on those that appear to have benefited economically from the crisis whilst most individuals and companies have become poorer.

 

  1. The existing digital sales tax is sub-optimal and should be abandoned in the event of an international agreement on comprehensive corporate tax reform. But in the shorter term, the UK tax can be revised so that it is closer to a minimum effective tax rate on profits rather than a turnover tax. This would help retain the progressive nature of corporate tax and not create the perverse incentives which may arise from a turnover-based tax. At the same time, the current digital sales tax is forecast to generate merely hundreds of millions of pounds in revenue, which is a small amount for the amount of political expenditure.

 

What is the right balance between taxation of work, savings/pensions and wealth?

  1. To have a good balance between the taxation of work, savings/pensions and wealth it is important that work is not over-taxed relative to wealth. Oxfam has highlighted the general trend of increased income, payroll and consumption taxes since the financial crisis whilst corporate taxes have reduced. Currently, income tax rates are higher than capital gains tax rates, and many other wealth taxes also mean returns to capital are more lightly taxed than other income from work. This exacerbates wealth inequality and creates incentives for those who can organise their tax affairs to reduce income from work and increase income from wealth.

 

  1. The exact balance between taxation of different types of income or assets should also be appraised alongside taxation on consumption because this type of taxation accounts for a significant proportion of tax revenues, and for some taxpayers is the biggest type of tax payment they make. There is a danger that relatively high levels of taxation on consumption can increase inequalities where taxation is based on the cost of consumption rather than ability to pay principle. There may be strong arguments for taxing the consumption of certain goods and services reasonably heavily (such as deterring carbon-intensive energy use or smoking which harms others’ health) but these social consequences need to be assessed alongside the impact on income or wealth inequality.

 

  1. Similar considerations need to be borne in mind when balancing the objective of raising revenue from taxing savings or pensions. When very large thresholds are only utilised by the very wealthy, it is also reasonable to consider reducing them – as the government has done on pensions contributions in recent years. 

 

What is the best way to tackle tax reform, including what changes might be needed at HMRC to support implementation, and how should the Government consult with stakeholders and parliament?

  1. Oxfam does not work closely with HMRC so we will not make specific suggestions for implementation processes. But we recommend that particularly given the need for an overhaul of the UK tax system, it is important that the government engages with and consults a wide range of stakeholders and parliament. Whilst budgets and similar ‘fiscal events’ provide scope for scrutiny of short-term measures, there is a notable absence of parliamentary time and capacity to look at longer term tax policy. It is vital that taxpayers, who in general are likely to be required to pay more tax, are engaged with clearly and given opportunity for consultation.

 

  1. Whilst it is difficult for governments to increase taxes, there are examples when governments have set out positive cases for tax rises and gained significant support for the changes. One principle that governments should adhere to is that when promoting broad-based tax increases, there should also be convincing plans to ensure adherence, especially amongst the wealthy. ‘Tax morale’ is important and can be strengthened if there is a reasonable expectation that everyone else will be paying the right amount of tax. Where governments do not have a clear plan for tax changes but so want to raise more tax revenue, using consultative processes such as Citizens’ Assemblies may be helpful in generating ideas and insights into how public attitudes will view a range of alternatives. 

 

August 2020