A Tax System Ruled by Focus Groups Won’t Deliver Growth

Lower after-tax returns from a new 8 per cent levy would encourage many small landlords to exit the market and others to incorporate to avoid the charge. Young and mobile renters, already priced out of home ownership, would be left scrapping for fewer flats as the market further consolidates.

This isn’t just bad housing policy, however. It’s emblematic of the intellectual decay in British tax policymaking. Politicians have abandoned any interest in working towards a coherent, neutral, pro-growth vision for the overall tax system.

Applying a payroll tax to a subset of investment income is an arbitrary abuse of the code. It taxes the supplier of housing, not the consumption of it. It widens the existing bias against private renting. And it piles another distortion on to a sector groaning under stamp duty, restricted mortgage deductibility and planning rules.

But it’s indicative of how contemporary policy is made. There’s no north star of an efficient tax code guiding decisions. Today’s tax increases reflect tinkering and ad hoc punishments meted out to politically convenient targets.

There was a time when tax policy had loftier system goals. Nigel Lawson wanted to “enhance incentives, eliminate distortions and heighten the spirit of enterprise”. Gordon Brown talked of a system of “principle” that “encourages work and saving” and was robust to globalisation. George Osborne created an Office of Tax Simplification to try to tidy up the web of distortions and biases.

That body was ultimately scrapped during Kwasi Kwarteng’s ill-fated chancellorship on the basis that pro-growth tax reform should always be embedded “into the heart of government”. Ha! Despite our weak productivity and numerous external commissions detailing how distortions undermine our economy, I can’t recall the last time a minister articulated economic efficiency as the lodestar for reform.

Why this lack of interest? MPs typically blame our fiscal challenges. Crisis spending has left us with high debts and interest costs, with an ageing population putting further upward pressure on spending. Yet the public is seen as increasingly intolerant to raising VAT, income tax or national insurance, as well as major spending cuts. The inevitable result, MPs say, is stealthy tax rises and narrow base extensions like this NI proposal, which might raise up to £2 billion.

Yet a tight fiscal environment with weak growth surely ought to make us more serious about raising revenue in less harmful ways. There’s plenty of reliefs, distortions and base erosions that could be reformed to increase revenue. Property taxes are ripe for complete overhaul.

That politicians spurn these ideas is a political judgment. Osborne’s 2012 “pasty tax” — a minor VAT tweak to standardise the tax treatment of hot food — triggered such a backlash that coherent reform is now seen as politically treacherous. Many ministers vowed never to touch a tax anomaly if it affects a group voters sympathise with.

Under Labour, ideological constraints compound the problem. Tax policy is now filtered through what you might call a “Resolution Foundation test”. The think tank’s former leaders — Torsten Bell and Dan Tomlinson — now hold influential roles in Treasury policymaking. The foundation’s whole shtick is making incremental tax changes that are “progressive” in isolation. That naturally sidelines many pro-growth reforms aiming towards a coherent whole.

The result is a system shaped by performative progressivity. Rachel Reeves celebrates “protecting working people” while targeting private jets, second homes, capital gains and private schools. The NI on rents proposal, notably, was a Resolution Foundation proposal too. These policies are focus group winners but rarely assessed through the lens of efficiency or growth.

The tax system then isn’t broken by accident. It’s broken because that’s how our politics prefers it: punitive, performative and piecemeal. Our growth prospects are the collateral damage.