Tweaks are not going to hack it

blog | Words Matthew Horne | 06 Jun 2024

A call for bold, long term reform of public services, financed by bold, long term reform of our taxes

Our public services are stretched to the limit and millions of families are just about coping with the cost of living crisis as inflation falls but prices continue to rise. The time for tinkering and tweaking is over.

The government’s pre-election budget, as well as early signs from Election campaigns, do not acknowledge – or address – the scale of the challenges we face. In this General Election we need to see bold long term investment and reform in our public services – that will require bold long term reform of our tax system, which we set out below. Only then we will see increases in economic productivity, reductions in poverty and inequality, and much needed improvements in our public services.

The problem

Despite the recent rises in the cost of living, our tax and benefit system imposes high marginal tax rates on some groups, and much lower tax rates on others. Particularly badly affected are people on universal credit, single parents receiving child benefit, parents receiving subsidised child care, and believe it or not all working age adults and all employees. 

Meanwhile, those that benefit most from our tax system are the self-employed, landlords, landowners, shareholders and people with income from capital gains. Our tax system is in desperate need of long term reform.

The current government plans to increase spending on public services by 1% in real terms. Given what they have promised to spend on the NHS and Defence this means that all other government departments will see their budgets cut – particularly worrying for local government, already facing bankruptcy in many places.

With chronic underinvestment in workforce, infrastructure and reform, we now face a perma-crisis in our public services from the NHS and social care, to public transport and prisons. Tweaks to our systems of taxation and public services just don’t add up. 

Towards a solution

Our public services desperately need renewal and innovation to help people stay well, stay out of prison and learn skills for the future – to flourish, and contribute to a growing, green economy. And that is only possible with proper long term investment generated by a reformed tax system that is fairer, that stimulates more economic activity and generates more investment in our public services. 

Innovations in taxation

Tax innovation can stimulate the economy, increase investment, and increase revenue for public services, yet we haven’t had any really major innovation in UK taxation since the invention of VAT in 1973. 

So what innovations in taxation could an incoming government consider?

• Make taxes fairer by aligning tax rates, so that business owners, the self-employed and wealthy people disposing of assets all pay similar marginal rates of tax to the 28.9m employees in this country. End the situation where we have high tax rates on employees, lower taxes on the self-employed, lower taxes still on income from shares, and even lower taxes on income from capital gains.
• Make taxes simpler by abolishing inheritance tax, and instead treating high value gifts and inheritance as taxable income for beneficiaries.
• Make taxes incentivise productivity by taxing land and landowners rather than properties and tenants. Abolish stamp duty and council tax and replace them with a form of land value tax designed to encourage development of high value land in urban areas for much needed housing, and encourage take up of agricultural subsidies that benefit the environment as a form of tax credit. 
• Make taxes greener by introducing a carbon tax applied through the full supply chain, reflecting the carbon concentration of products and services, backed up by a carbon tax at the border that prevents us from outsourcing our carbon emissions. Our current green taxes, such as fuel duty and Air Passenger Duty, are piecemeal and inadequate to ensure the transition to a net zero economy. 

All of these innovations in taxation have the potential to be fairer and generate more revenue to invest in our public services and in our economy, through increased taxation on unearned income, ownership of land and businesses, and carbon consumption. 

Innovation in the tax system is not an end in itself but a means to addressing our very large and very real problems as a society. The prize is significant. We have 20 years experience of driving innovation in health, social care, education, local government and the justice system. We have learned a lot, and we have written elsewhere about the lessons of the last 20 years and our seven principles to innovation and reform for public services.

Our vision for public service reform

Together, these bold reforms in taxation and public services are fundamental shifts to our social contract. Tweaks are not enough. 

We need to be in the zone of bold long term reform and investment where innovation in our tax system and in our public services go hand in hand. We will read the election manifestos carefully, looking for signs that any party has grasped just how grave the current situation is;  just how difficult it is going to be to turn things around;  just how honest they need to be with the public about how much it is going to cost to provide the investment and reform; and just how bold and brave our politicians will have to be.