Written evidence submitted by the Adam Smith Institute
Tax After Coronavirus
Managing the Covid-19 pandemic has been an unprecedented challenge, and the Government has taken similarly unprecedented in response. This has meant attempting to freeze the economy, through the Job Retention Scheme, business loans and various handouts.
In beginning the unfreezing of the economy, the Prime Minister and Chancellor have set out some extensive measures, most notably the holiday on Stamp Duty. But they will have to go much further in the Autumn budget, particularly as the Job Retention Scheme winds down.
The economy is in an extremely precarious position. The ONS estimates the deficit is going to rise to £300bn by next year. Our national debt is bigger than the economy for the first time since 1963.
Rather than pursuing a strategy of big bailouts and taking stakes in companies, the Government must embrace an agenda focused on private sector led growth. A strong economy is crucial to spread opportunity and fund the planned huge infrastructure and public service. It is now even more of a necessity to ensure that the effects of Covid-19 do not paralyse the economy.
As such, steps must be taken to reduce the footprint of the government in the economy, boost employment, reform insolvency arrangements, support hospitality and retail, reduce the tax burden on enterprises, support housing reform, improve accessibility to child care, champion trade and immigration, and back innovative new transport.
Any tax increase that actively undermines business and employment will send a message to investors that Britain is “closed for business”.
What pressures will be put on the tax system as a result of the pandemic?
In April, Government receipts fell by £16.4 billion compared with April 2019.
With the UK now in its first recession in 11 years, it is likely the Government will experience a further reduction in tax revenue.
While there are some encouraging signs of economic recovery, a full v shaped recovery should not be assumed. Raising tax revenue should not be prioritised right now. To do so would hold businesses down as they attempt to bounce back from the pandemic, exacerbating rather than ameliorating the recession. Lower revenue should be accepted for at least the next tax year.
Is now the time for tax reform?
The Government should make it as easy as possible for businesses to rebound. Rather than increase existing taxes and levying new ones, it should abolish the Factory Tax, to encourage investment and labour productivity in UK based manufacturing, and it should raise the national insurance threshold to encourage the hiring and retention of employees.
The Chancellor should resist the temptation to push a tax heavy budget for the sake of political expediency this Autumn. Planning to raise taxes now and cut them before the election would be putting the cart before the horse. Long term protection of the tax base must be predicated on growth in providing existing businesses the confidence to continue operations now and expand in the future, and for new businesses to start up.
Reform must focus on making lower, flatter more simple and less burdensome.
Is there a role for windfall taxes in the post Coronavirus world?
A special tax would make little sense. For one, there is little evidence that large retailers and supermarkets have made an increased profit as a result of the pandemic.
They have kept us fed, our internet flowing and ensured we are entertained and informed. They have adapted their production lines to manufacture personal protective equipment, offered to provide testing to healthcare workers and the public, and are helping develop and potentially manufacture new treatments and vaccines.
Levying a windfall tax on these businesses, which have swiftly adapted to provide stable services during the pandemic would add insult to injury, rewarding innovation with expropriation.
Resist raising taxes
The Government must not mistake the health of its own accounts for the wellbeing of the national economy. It is vital that it does not pursue a strategy of raising taxes. To do so would be to place a burden on both businesses and individuals as they try to build up momentum lost to Covid-19. Tax increases, particularly as other countries are cutting to attract investment, would strangle the recovery.
The Government should distinguish between an increase in the stock of debt, to pay for measures during this crisis, and a structural deficit, like the permanent unsustainable spending that needed to be tackled after 2010.
Raise the employer’s National Insurance threshold
Employers’ National Insurance is an unnecessary drag and cost to employment. Employees currently pay National Insurance at the following rates on their earnings. For the first £7,605 they pay 0 percent, for the next £34,870 a rate of 12 percent is levied, and a further 2 percent is levied for amounts over £42,475. Employers pay 13.8 percent on every pound the employee earns over £7,488 with no cap.
If the government wants to encourage firms to hire they should immediately raise the bottom threshold for employer’s National Insurance to £12,500.
Abolish the Factory Tax
The Factory Tax is the inability to fully expense investments in machinery and buildings. Unlike expenditure on running costs, expenditure on fixed investment can only be written off over time, which fails to account for inflation and a real return on capital. This means, in real terms, firms pay a tax — a Factory Tax — on investment in buildings and machinery.
By allowing for the immediate full write off on capital investments, the Government could boost investment by 8.1 percent and labour productivity by 3.54 percent (£2,214 per worker) in the long-run.
Allow companies to bring back revenue from overseas tax-free for 18-24 months to encourage greater investment in the UK
Hundreds of billions of pounds of money in the name of British businesses sits in other countries. This cannot currently be invested in the UK. Capital flows from overseas should be encouraged for economic recovery. Part 7A charges under the ITEPA2003 should be suspended for a period of twelve months to allow offshore wealth to be brought back into the UK without tax liabilities. These funds could then be directly invested in the UK economy, boosting economic growth.
Combine enterprise investment schemes and refocus on private capital
The UK currently has four venture capital support schemes: the Enterprise Investment Scheme (EIS; max investment of £12m), the Seed Enterprise Investment Scheme (SEIS; max investment of £150k), the Social Investment Tax Relief (SITR; max investment of £1.5m), and Venture Capital Trust (VCT; max investment of £12m).
All four schemes offer financial support to small and medium sized companies and social enterprises significant tax advantages to the investor, including income tax relief of up to 30 percent of investment, no capital gains tax on profits if held over a defined period, investment losses that can be offset against income taxes, and no inheritance tax on shares.
The seven year restriction on EIS should be removed. Knowledge Intensive Companies’ ten year restriction should also be removed. The seven year restriction is already not hard and fast with multiple exceptions for new geographic markets or new products. Simplification where possible is positive. The preference should be for private capital and not creating incentives to seek out taxpayer reliance.
In addition, the Government should commit to a target of all advanced assurance applications under the schemes to be complete within two weeks.
Remove the triple lock on pensions
The pandemic has necessitated an unprecedented level of expenditure and a broad fall in earnings. Committing to a triple lock on pensions does not make sense in this context, and it is unfair to ask younger taxpayers to bear this burden, particularly when it could mean state pensions grow faster than wages.
The 2.5 percent lock is an arbitrary figure, it allows for a huge real term increase in pensions while wages and the cost of living is flat, providing pensioners with a rise in wages while workers’ wages are stagnant. The triple lock should be replaced with a double lock, so pensions continue to rise with wages or price inflation, whichever is higher, so that the value of the pension is maintained over time. This change has been estimated to save £20 billion over 5 years.
The Government should distinguish between an increase in the stock of debt, to pay for measures during this crisis, and a structural deficit, like the permanent unsustainable spending that needed to be tackled after 2010. Avoiding tax increases and allowing for economic growth will “pay” off for the state coffers in the long run: a bigger economy generates more tax revenue.
It is essential the Government does not strangle growth with new, excessive taxes. In fact, they must take the opposite approach: reforming taxes to reduce the burden on enterprises while dealing with red tape that undermines prosperity. This means a laser-eye focus on how to enable transactions, investment, employment and access to goods and services.
For more detailed analysis and recommendations please see our report, Winning the Peace: How to safely unfreeze the economy and unleash British enterprise.