Britain faces a stark choice between paying higher taxes or accepting an inevitable deterioration in public services and the welfare state, a report says.
In an in-depth study of the UK tax system, the Institute for Fiscal Studies (IFS) thinktank said the already high level of taxes and the weak prospects for growth meant voters faced a tough choice.
The IFS said if the political choice was to pay higher taxes, root-and-branch reform of the system would be needed to reduce the economic pain that higher levies would involve. This was because every one of the UK’s principal taxes was flawed, it added.
The report, which was produced in partnership with the innovation foundation Nesta, noted that capital was taxed at a lower rate than income; the income tax system has been made more complex since the Conservatives came to power in 2010; exemptions from VAT cost the exchequer £100bn a year; the council tax system in England and Scotland was based on property valuations dating back to 1991; and environmental levies lacked consistency.
Helen Miller, a deputy director of the IFS and head of the tax sector, said: “The tax and spend choices that face future governments are not enviable. The big-picture choice effectively boils down to increase taxes or reduce the size of the state.
“Living standards are shaped not only by how much tax revenue is raised and what it is spent on, but also by how it is raised. It is hard to think of a tax that doesn’t need serious reform.
“Better designed taxes would make us more productive, and therefore ultimately richer. Taxes could also be fairer if we stopped taxing very similar people in very different ways.”
Taxes as a share of national income have been rising in recent years and are on course to hit the highest level in 70 years later in the decade. While high by historical standards, the IFS said taxes were not high compared with the rest of western Europe.
The thinktank said it was not inevitable that taxes would rise, but added: “Without tax rises, UK public service and benefits provision will not simply tread water, it will deteriorate. Unless levels of tax increase substantially, a reduction in the scope of the public services that the British state provides is likely inevitable.
“Unless something major changes – such as an acceleration in economic growth – it will not be possible to maintain public services and keep tax at current levels.”
