MPs have been warned that introducing another “tax lock” against rises would be bad policy, according to the highly regarded Institute for Fiscal Studies.
The so-called “tax lock” was a policy in the Conservatives’ 2015 manifesto which pledged to prohibit any increase in the rates of income tax, National Insurance or VAT.
But the IFS pointed out that together, these three taxes contribute almost two-thirds of tax revenues.
In a briefing note it said: “A government that wanted, or thought it might be necessary, to raise additional revenues in future would be foolish to tie their hands by ruling out increases in these workhorse taxes.
“Such a constraint would also prevent desirable tax reforms, as we have seen in relation to the taxation of the self-employed, restrict the policy levers available to deal with any unexpected change in the economy and possibly lead to poor policy choices if a government is forced to rely heavily on smaller taxes.”
Among the issues which the IFS said needed addressing was the fact that since 2008 40 per cent of workforce growth has come from people working for their own businesses through self-employment or company owner-management.
But these people are taxed substantially less heavily than employees.
The Office for Budget Responsibility forecast that revenues will be £3.5bn lower in 2021–22 as a result of growth in incorporations outstripping employment growth, and another £1bn lower as a result of further growth in self employment.
In March the Chancellor of the Exchequer Philip Hammond attempted to increase the National Insurance contributions for self-employed people by 1 per cent to 10 per cent but had to scrap the proposals because it was criticised for breaking the “tax lock”.
The IFS also pointed out that the increase in the number of individuals working for their own companies and taking income through dividends makes income tax receipts more unpredictable.
damian.fantato@ft.com
