Paul Johnson, IFS

1. Tax By Design: The Mirrlees Review Paul Johnson, IFS

2. Aims for today • Provide a very quick overview of the review • What it was • What the top level conclusions were • Share some reflections on what we learnt • Set out some issues for further work

3. The review • Built on a large body of economic theory and evidence • Aimed to: • Identify features of good tax system for open developed economies • Assess the extent to which the UK system conforms • Propose reforms • Two volumes • Dimensions of tax design • Tax by design • A distinguished set of authors: • Sir James Mirrlees, Stuart Adam (IFS), Tim Besley (LSE), Steve Bond (Oxford), Richard Blundell (IFS and UCL), Robert Chote (IFS), Malcolm Gammie QC, Gareth Myles (IFS and Exeter), Jim Poterba (MIT and NBER)

4. Tax should • Work as a system • Not discriminate between similar activities • Except under very limited conditions • Achieve progressivity as efficiently as possible

5. What we have • Does not work as a system • Lack of joining up between income tax and NI • Personal and corporate taxes

6. What we have • Does not work as a system • Lack of joining up between income tax and NI • Personal and corporate taxes • Is not neutral where it should be • Inconsistent savings taxes with normal return often taxed • Corporate tax system that favours debt over equity

7. What we have • Does not work as a system • Lack of joining up between income tax and NI • Personal and corporate taxes • Is not neutral where it should be • Inconsistent savings taxes with normal return often taxed • Corporate tax system that favours debt over equity • Is not well designed where it should deviate from neutrality • A mass of different tax rates on carbon • Failure to price congestion properly

8. Implicit carbon taxes in the UK, 2009-10Excluding VAT subsidy of domestic energy

9. What we have • Does not work as a system • Lack of joining up between income tax and NI, • Personal and corporate taxes • Is not neutral where it should be • Inconsistent savings taxes with normal return often taxed • Corporate tax system that favours debt over equity • Is not well designed where it should deviate from neutrality • A mass of different tax rates on carbon • Failure to price congestion properly • Does not achieve progressivity efficiently • VAT zero rating a poor way to redistribute • Taxes and benefits damage work incentives more than necessary

10. Our proposals • Treat the system as a whole • Integrating NI and income tax • Aligning tax rates across employment, self employment and profits

11. Our proposals • Treat the system as a whole • Integrating NI and income tax • Aligning tax rates across employment, self employment and profits • Move towards neutrality • Widening the VAT base • Not taxing the normal return to capital

12. Our proposals • Treat the system as a whole • Integrating NI and income tax • Aligning tax rates across employment, self employment and profits • Move towards neutrality • Widening the VAT base • Not taxing the normal return to capital • Whilst proposing sensible deviations from neutrality • Imposing a consistent tax on GHG emissions and on congestion • Imposing zero rate of VAT on childcare

13. Our proposals • Treat the system as a whole • Integrating NI and income tax • Aligning tax rates across employment, self employment and profits • Move towards neutrality • Widening the VAT base • Not taxing the normal return to capital • Whilst proposing sensible deviations from neutrality • Imposing a consistent tax on GHG emissions and on congestion • Imposing zero rate of VAT on childcare • Achieve progressivity through the direct tax and benefit system • Recognising constraints imposed by responses to incentives • Taking account of lifetime welfare

14. Issues to consider • Measurement and assessment of equity • Especially in a lifecycle context • The long term effects of taxes • Again the lifecycle matters • The role of evidence and theory • Priorities for future work • The nature of the policy making process

15. Measuring distribution • The standard decile chart has limitations • Takes no account of the lifetime effects • Consider our proposed reform to the VAT system, a largely uniform VAT with offsetting tax and benefit reforms to achieve • Broad distributional neutrality • No worsening of work incentives • How do we measure the distributional effect?

16. VAT reform: effects by income

17. VAT reform: effects by expenditure

18. Long term effects • We have a pretty good handle on short term effects of taxes on labour supply, consumption etc • But what about the long run? • How do taxes affect investment in human capital? • What are effects on family formation? • How does the capital stock respond? • Given that much redistribution still occurs over the lifecycle, are there more efficient ways of linking payments to benefits?

19. Theory and evidence • Careful use of evidence can take us a long way • E.g. responsiveness to incentives, importance of extensive margin

20. Figure 3.2a Employment for men by age, FR, UK and US 2007 Blundell, Bozio and Laroque (2011)

21. Theory and evidence • Careful use of evidence can take us a long way • E.g. responsiveness to incentives, importance of extensive margin • What do we do when evidence is missing? • Strong implicit assumption that theory is a good guide • Evidence on welfare effects is limited • Though effects look big where we do have evidence • Compliance, and compliance costs, relatively neglected

22. Theory and evidence • Careful use of evidence can take us a long way • E.g. responsiveness to incentives, importance of extensive margin • What do we do when evidence is missing? • Strong implicit assumption that theory is a good guide • Evidence on welfare effects is limited • Though effects look big where we do have evidence • Compliance, and compliance costs, relatively neglected • N.B. Different discourses among economists, lawyers, accountants

23. Taxation of land and property(an example of the role for clear thinking) • Conceptually, must distinguish: • Business land • Business property • Domestic land • Domestic property • And the fact that housing represents both an asset and a consumption good William Vickrey: The property tax is, economically speaking, a combination of one of the worst taxes – the part that is assessed on real estate improvements…and one of the best taxes – the tax on land or site value

24. Land and property taxation: a summary Current, ideal and proposed treatments

25. Land and property taxation: a summary Current, ideal and proposed treatments

26. Priorities for further work • Evidence gaps: • Lifetime effects of taxes • Many issues in incidence of taxes • Effects on entrepreneurship • Welfare effects of theoretically good changes • Practical issues: • Taxing financial services effectively • Practicality of land value tax (and of regular revaluing for council tax) • Practicality of reforms to IHT • Issues for rate of return allowance

27. The policy making process • Why do we (always) lack a statement of tax strategy? • How can we ensure the tax system really is treated like a system? • How do we escape the “tyranny of the status quo”? • Can we impose greater burdens of proof before changes are made that move us from neutrality? • Should we have more checks and balances, more evaluation, more scrutiny?

28. Conclusions • The design of tax matters hugely for national prosperity • Not surprising when tax takes nearly 40% of GDP • Reform is hard but the prize is big • There has been little sense of direction on tax policy • The review sets out a possible direction • and challenges government to define a strategy • But major questions remain to be resolved

29. Conclusions • The design of tax matters hugely for national prosperity • Not surprising when tax takes nearly 40% of GDP • Reform is hard but the prize is big • There has been little sense of direction on tax policy • The review sets out a possible direction • and challenges government to define a strategy • But major questions remain to be resolved • We should “have a tax system which looks like someone designed it on purpose” former US Treasury Secretary William E. Simon