Britain's Economically Damaging Tax System Is Now Indefensible

6th April 2023

The Director of the Institute for Fiscal Studies Paul Johnson points out the flaws in the UK tax system that are increasing.

In remembering Lord Lawson, it is surely his 1988 Budget which will stand as his defining moment as chancellor. Indeed, it was one of the defining budgets of my lifetime.

It was the year in which he abolished all rates of income tax above 40pc: before 1988 there were rates of 40, 45, 50, 55, and 60pc for higher earners. At the same time, he cut the basic rate of income tax from 27pc to 25pc. He also announced independent taxation of husband and wife, sweeping away the 180-year old system which treated the income of a married woman as if it belonged to her husband. And he even found time to reform capital gains tax, bringing rates into line with income tax.

It turned out that the scale of the tax cuts was poorly judged from a macroeconomic point of view. They bore at least some responsibility for the boom and bust that followed. But Lawson's reputation as a tax reformer is well deserved. He left the tax system in a far more coherent and much simpler state than that in which he found it. The same cannot be said for any of his successors. Most, if not all, have achieved the reverse.

Those reforms were a huge simplification, a big boost to incentives for higher earners and, of course, a big giveaway to the rich. They played their part in cementing higher levels of income inequality which had grown so fast during the 1980s - though they were by no means the main driver of those changes. That broad, simple structure of a dual rate income tax system largely survived for 20 years.

The vast majority paid at the basic rate, which was gradually reduced to 20pc under both Conservative and Labour chancellors, while a smallish minority paid the 40pc higher rate.That legacy has been almost entirely trashed since 2010.

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