The UK tax system is facing considerable, if misguided, criticism. As the Institute for Fiscal Studies’ Mirrlees Review concluded, the current system is extremely expensive and very unfair. Sir James Mirrlees chairs the independent review. A large invisible tax represents the complicated suite of welfare benefits, and it demonstrates how many low earners experience extremely high effective tax rates. It calls on Congress to embrace radical reform to provide a more consistent and comprehensive vision for the nation’s tax and benefit systems.
The review points out that the existing tax structure, which includes both income tax and national insurance (NI) contributions, is unnecessarily convoluted. The need for different forms, and subsequent complexity, is a confusing and burdensome experience for taxpayers, the report states, especially for lower-income earners. These findings from the review come in line with previous reviews by the Institute of Fiscal Studies. They have long denounced the state of UK taxation.
The UK system is a long way from the best in expensive and unfair ways,” said Sir James Mirrlees. He went on to explain that the present code penalizes saving and investment, as well as skewing the types of saving and investment. It doesn’t do nearly enough to tackle urgent problems like climate change and growing traffic congestion.
Mirrlees emphasized that the revenue generated and the redistribution provided by the current system could be achieved in less costly and more effective ways.
Unfortunately, recent changes to the tax structure have created what is widely perceived as a “bizarre” marginal rate system. Angela Beech, an expert in tax policy, expressed concerns regarding the potential merger of income tax and national insurance, saying it would lead to “a plethora of ridiculously complex rates of tax.” This complexity goes from 0% all the way up to 52%. It further obfuscates the financial picture for middle and low-income earners.
The review calls for a radical simplification of welfare benefits. It suggests replacing the majority of existing benefits with one more cohesive integrated benefit. This recommendation is intended to cut through the existing welfare maze, a system often decried as too complicated.
Not all experts are on the same page about the changes under consideration. Richard Murphy cautioned that “many of the recommendations in this report would have a very negative impact on people on low incomes.” He expressed concern that merging income tax with national insurance may be “very unfair to the elderly, who don’t pay NI.”
The Mirrlees Review Recommendation 26 calls for simplifying the income tax rate structure and merging this with national insurance to increase efficiency. This approach creates troubling equity issues across demographic groups.
The UK tax system already has a zero rate of Value Added Tax (VAT) across a wide range of economic sectors. Critics call this method “an expensive and extremely inefficient” means of helping low-income people. Critics say that this creates a misleading picture where everything seems wonderful at first. It adds unnecessary complexity without addressing the fundamental problems.
Congressional debate on reform continues to rage on. Government and financial stakeholders in particular need to take a deeper look at these important findings and recommendations. Developing a more equitable tax system isn’t easy. It’s important that this new system helps stimulate economic growth as well.