Written evidence submitted by Professor David Heald (Professor of Public Sector Accounting at Adam Smith Business School, University of Glasgow) 
Reforming Taxation in the Disunited Kingdom
The Tension between Neutrality and Subsidiarity
a) Neutrality refers to minimising the distortionary costs of taxation arising from induced behavioural change by firms and households. Except where taxes are explicitly intended to change behaviour (e.g. environmental taxes), fiscal economists strongly support neutrality, almost irrespective of their views about the desirable size of the state. In contrast, neutrality seems to have a low weight among politicians and electors. The wide and persistent gulf between expert views and public opinion on taxation has been demonstrated by Lim et al. (2013) who compared US survey responses at three historical dates (1934, 1994 and 2013). Unfortunately, there are no comparable UK surveys, but the conclusions resonate. Whereas fiscal experts generally favour broad-based taxes and rates as low as possible consistent with revenue targets, politicians respond to pressure group demands for exceptions which multiply in number and lead to higher economic distortions. Transaction taxes are less visible and affect a smaller proportion of the electorate at any one time, but increase revenue volatility and are severely distortionary. For example, Stamp Duty Land Tax in England (transaction tax on house sales) is more distortionary than an annual tax on occupation, but it is much less visible to electors than is council tax that is still levied on 1991 valuations in England and Scotland, notwithstanding massive shifts since then in relative house prices
b) Subsidiarity refers to the match between expenditure responsibilities and revenue resources in a governmental system with tiers of government (e.g. central, devolved and local). There are two main ideas. First, that fiscal decisions on expenditure and taxation taken at a lower level might better reflect citizen preferences when there are geographical variations in those preferences. Second, that elected sub-national governments should be fiscally accountable to their own electors by directly raising some of their own revenues rather than depend exclusively on grants from higher-level governments. A degree of Vertical Fiscal Imbalance is inevitable in a welfare state providing education, health and social security benefits, but its extent should be constrained. The proportion of own revenues at the state/provincial level in federal countries varies enormously: for example, high in Canada and low in Germany.
a) The desired size of the state, proxied by the public expenditure/GDP ratio
b) The degree of progressiveness of the tax system as a whole, as focusing on particular taxes in isolation is misleading
Substantial tax reform is unlikely unless the tax system is considered as a whole, and the resulting design commands a broad measure of support across the political spectrum while allowing for future political choices on the trade-offs. Otherwise, there would be strong resistance to tax reform stemming from fears that there would later be piecemeal changes that unwound political compromises. COVID-19 has reinforced existing social and economic inequalities but it remains too early to know whether there will be long-term attitudinal shifts on taxation. Conventional wisdom is that losers protest about tax reform while winners are silent or do not notice their gains. The usual timing for major tax reform is when public finances are abundant and the loss to losers can be moderated through phased implementation and/or direct compensation. The present circumstances are dramatically different.
a) Improving the public policy community’s understanding that effective incidence (who bears the burden) differs from the nominal incidence (who pays the tax bill). For example, taxes on companies, whether Corporation Tax or Employer NICs, may be shifted backwards to employees and/or forwards to consumers, rather than being entirely borne by shareholders
b) It is essential that tax authorities, particularly Her Majesty’s Revenue & Customs (HMRC) are resourced to the extent required by their operational tasks and the tax reform agenda. Without the enhancement of systemic implementation capacity, tax reform might suffer the debacles of Universal Credit. Computerisation and digitalisation have been routes to HMRC cost reduction, without sufficient regard for enforcement and resilience. The issue is not just lost tax revenue through the Tax Gap, but one of public trust in the fairness of the tax system. The notion that taxes are ‘voluntary’ for some is destructive, encouraging non-compliance and resistance to reform. Moreover, the division of policy responsibilities between the Treasury and HMRC should be reviewed, and the mandate of the Office of Tax Simplification enhanced
c) In a world where global companies are so important and digital technologies make location of economic activity more difficult to establish and monitor, corporate taxation is highly problematic. Progress in this arena depends on international co-operation, for example through the OECD’s BEPS project and through policy initiatives by the European Union. The deteriorating climate of international relations between major powers does not lead to optimism
d) The inequalities highlighted by COVID-19 have drawn renewed attention to the higher proportion of total income accruing to the Top 1%, leading to discussion of a possible wealth tax. Wealth taxes are difficult to manage, particularly in a globalised world. Unintended consequences of a wealth tax levied on net assets excluding main residence and pensions could be further diversion of private wealth into such protected forms
e) The relationship between Income Tax and NICs which are a second income tax on a narrower base but which Governments have assumed to be less politically sensitive to rate changes. The lower threshold for NICs has also created problems for the operation of the Scottish Parliament’s devolved income tax powers (Heald, 2020)
f) There should be agreement between the UK, Scottish and Welsh Governments for a synchronised revaluation of the tax base for council tax. Assuming the banding system is retained, there should be more bands at the top end. Given that existing valuations in England and Scotland will then be more than 30 years out of date there would have to be safety nets
g) Long-term economic changes such as the growth of online retailing have undermined Business Rates which require a fundamental rethink across the UK
h) The removal of EU regulation of VAT will make the UK’s existing narrow base for VAT more vulnerable to lobbying pressure, thereby threatening revenues. An effective VAT system is required to fund the welfare state and to repair the fiscal damage done by COVID-19.
Heald, D. (2012) ‘Why is transparency about public expenditure so elusive?’, International Review of Administrative Sciences, Vol. 78(1), pp. 30-49.
Heald, D. (2020) ‘The politics of Scotland’s public finances’, in M. Keating (ed.) The Oxford Handbook of Scottish Politics, Oxford, Oxford University Press, pp. 512-42.
IMF (2016) United Kingdom Fiscal Transparency Evaluation, Country Report 16/351, Washington DC, International Monetary Fund.
Lim, D., Slemrod, J. and Wilking, E. (2013) ‘Expert and public attitudes towards tax policy: 2013, 1994, and 1934’, National Tax Journal, Vol. 66(4), pp. 775-806.
Mirrlees, J., Adam, S., Besley, T., Blundell, R., Bond, S., Chote, R., Gammie, M., Johnson, P., Myles, G. and Poterba, J. (2011) Tax by Design: The Final Report of the Mirrlees Review, Oxford, Oxford University Press.
Muscatelli, A. (2008) First Evidence from the Independent Expert Group to the Commission on Scottish Devolution, Edinburgh, Heriot-Watt University.
Smith, S. and Barents, R. (1996) Neutrality and Subsidiarity in Taxation, London, Kluwer International.
Treasury Committee (2020) ‘Call for evidence: Tax after coronavirus’, available at: https://committees.parliament.uk/call-for-evidence/206/tax-after-coronavirus/ (last accessed 28 August 2020).
 Sole responsibility for the contents of this memorandum rests with the author.
 Northern Ireland does not have council tax but regional and district rates, to which parallel issues apply.
 Valuations in Wales are from 2003 and in Northern Ireland from 2005.
 A progressive tax system might include individual taxes with regressive incidence, for example, tobacco and some environmental taxes.
 For example, broadening of the UK’s narrow VAT base, as recommended by Mirrlees et al. (2011), might be compensated by changes to other taxation (income tax or NICs) and through higher welfare benefits. However, the 2010s’ austerity experience might fuel fears that compensatory measures would later be reversed.
 Domestic Tax Base Erosion and Profit Shifting.
 As evidenced by the latest increase in the UK basic rate of income tax being for 1975-76.