1. IFS Making change happen Paul Johnson IFS

2. © Institute for Fiscal Studies, 2008 Making change happen Mostly concerned with economics of tax –Issues of incentive compatibility, neutrality, labour supply etc But intended to influence tax policy –so needs to understand how policy change happens And how it doesnt Two chapters focussing on these issues –Political economy –Compliance and administration

3. © Institute for Fiscal Studies, 2008 Some thoughts on Barriers between analysis and policy –Are we even evolving in the right direction? Some changes over 30 years –And some failures to change Example of climate change

4. © Institute for Fiscal Studies, 2008 From economics to implementation Politics –Taxes seen in isolation –Lobbying and influence –Lack of accountability Lack of transparency Transition –Windfall gains and losses Administration Difficulty of long term commitment

5. © Institute for Fiscal Studies, 2008 Politics Tax policy making is different –No green papers PBR not generally playing that role –All powerful Treasury Even within the executive lack of checks and balances –Limited parliamentary accountability Greater scrutiny, both by parliament and externally are likely to be crucial

6. © Institute for Fiscal Studies, 2008 Political debate Discussion rarely about tax system – tax debates are disconnected –Individual elements become hard to change Elements of the system become self sustaining –Interest groups are created Example of R&D tax credit

7. © Institute for Fiscal Studies, 2008 Which can make for chaotic policy making 1997 10p tax rate introduced –2008 10p tax rate abolished 1997 taper relief for capital gains introduced –2008 taper relief for capital gains abolished in a farcical process Zero per cent rate for small businesses introduced and abolished Payment of tax credits …

8. © Institute for Fiscal Studies, 2008 Transparency Incidence very unclear – even to economists Hence role of fiscal drag, stealth taxes Different trends in NI and income tax rates –Deliberate confusion sown over role of NI Very big increases in number of higher rate tax payers –<1 million in 1985, c. 3.5 million now

9. © Institute for Fiscal Studies, 2008 Transition Windfall gains or losses for existing asset holders –can create major efficiency costs Short term impacts can be very different from long term –Income tax to VAT –Employer v employee NI Administrative costs, teething problems, angry losers Transition costs may be big and need weighing against benefits –Incremental reform v big bang

10. © Institute for Fiscal Studies, 2008 Administration How tax is administered, and compliance ensured, matters a lot –Standard theory can be extended to take account of admin issues Tax credits Self assessment Inheritance tax Future challenges

11. © Institute for Fiscal Studies, 2008 Good things have happened End of mortgage interest relief –Phased out carefully Widening of bases and cutting of rates –Gradual process Tax credits Abolition of ceiling for employer NICs –But not for employees More expenditure tax treatment of savings –Gradually self sustaining

12. © Institute for Fiscal Studies, 2008 But lots havent Abolish stamp duties Integrate income tax and NICs Widen VAT base Remove small companies corporation tax rate Stop grandfathering emissions permits

13. © Institute for Fiscal Studies, 2008 Climate change Very big new challenge for policy, including tax But with considerable complexity –Different starting points Economic v scientific/precautionary –Range of possible instruments –International considerations –Equity And multiple uncertainties –Including over what will happen to EU ETS

14. © Institute for Fiscal Studies, 2008 Approaching climate change Some basic principles government accepts, following on from Stern –Centrality of consistent pricing –Importance of international system of trading –Role of other instruments like technology support Reality is: –EU ETS is central But with grandfathered permits and limited coverage –But tax policy inconsistent and piecemeal Domestic energy consumption still subsidised

15. © Institute for Fiscal Studies, 2008 Conclusions Framing of policy matters –For governments and independent commentators As does understanding administration Greater transparency and scrutiny vital –And perhaps checks and balances Well be making recommendations with our eyes open…