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From Politics to Prudence: The Case for UK Tax-Setting Independence

The United Kingdom’s Chancellor, Jeremy Hunt, has revealed plans to slash another 2p off national insurance in a pre-election mini-budget. Sunak and Hunt seem determined to remove national insurance altogether, arguing that it is a “double tax” on income. The cuts are another attempt to add policy to the presently meagre offering from the Conservative election campaign.

The Shadow Chancellor, Rachel Reeves, was forced to announce Labour tax plans to one-up the Tories and fill in funding gaps. Labour hopes to crack down on non-compliance and tax avoidance, tax the earnings of private equity bosses and end the non-dom exemption. Reeves vowed to use the revenue to fund the NHS and breakfast clubs.

Yet, perhaps, both Chancellors are missing something. Tax experts galore have criticised and argued against their respective plans.

The IMF warned against Hunt’s cuts due to Britain’s fragile public finances and worsening debt trajectory. Aggressive fiscal stimulus during the pandemic has left little room for manoeuvre.

Slower than expected rate cuts will inflate the cost of government borrowing and likely reduce the scope for the eye-catching cuts Hunt wants. The UK is one of three other major economies listed by the IMF as requiring imminent policy action to mitigate fiscal deficits. In January, the fund recommended Hunt spend on key public services and climate change. The Chancellor, however, remains set on pleasing the electorate.

Similarly, as pertains to Rachel Reeves’s policy platform, tax experts have argued that enforcing compliance is a costly measure. Improving the quality and quantity of compliance requires time to recruit and adequately train officers. Experts doubt the expected £5 billion could be raised anywhere near as swiftly as Labour envision.

The crackdown on non-dom tax status may also lead to ultra wealthy individuals leaving the UK altogether. The traditional tax havens are likely to benefit — think Monaco or Dubai. Conversely to Labour, many other European countries are introducing tax policies that have bolstered their attractiveness. The Italians recently introduced a scheme where €100,000 is paid in tax, irrespective of income, on foreign earnings.

Each tax policy seems to have its issues — as I am sure the respective Chancellors are aware. Yet political pressure is forcing both of their hands. So, I think, two crucial questions are raised:

Should the government oversee tax-setting? Is there a case to be made for an independent tax-setting body?

Political parties are far from independent. Politicians are subject to political influence, particularly the current Chancellor. Tax is perennially being manipulated for electoral purposes. An independent tax body would be insulated from politics, preventing short-term policy changes. Tax would, as a result, become far more stable and predictable.

The respective Chancellors are undeniably qualified — Reeves holds an Economics MSc, whilst Hunt studied PPE, and both have long careers in economic policymaking. Undoubtedly, however, political influence skews the extent to which this knowledge is used positively. An independent body would have specialised knowledge of economics, tax law and public policy. This expertise would result in more informed and sound tax decisions. Imagine tax rules based on sound analysis and economic principles, rather than political gravity.

Decisions founded upon sensible economics are easier to understand and justify. If Hunt were transparent about his rationale behind cutting national insurance, perhaps nobody would be convinced by them. Being honest with the public would build trust in the tax-setting body. Independence inculcates confidence that they place the country’s interest first — unlike political actors.

If this independent body’s governors were afforded long terms, like the Bank of England, tax authorities would prioritise long-term financial and economic stability. Policy decisions would be strategic, forward-thinking, and promote fiscal responsibility. The current speculation on the future of tax policy, despite the certainty of a Labour government, is potentially harmful — hence the drama in the UK surrounding wealthy non-doms. An independent body could offer a clear sense of policy direction — a direction that is beyond politics and rather embraces prudent economics and law.

However, longer terms and appointed (rather than elected) officials, raise doubts about accountability. Members of an independent body may not face direct scrutiny for their decisions. Without scrutiny an independent body risks being captured by special interests, like corporations or wealthy individuals, or simply becoming mired in groupthink. Decision-making becomes skewed for an elite, rather than broader societal interests.

However, the Bank of England was made independent for roughly the same reasons. Interest rates were being manipulated for political ends, rather than sensible economics. An independent body has brought a sense of prestige and confidence.

Furthermore, the problems of an independent body have largely been solved. The Governor answers to Parliament and frequently faces scrutiny from MPs. The Bank of England cooperates with the Financial Conduct Authority and the Payment Systems Regulator.

So why not free taxation from politics?

If Liz Truss and the Free Enterprise Group had their way, this would never come to pass. Truss’s mini-budget was as overt a slap in the face to Governor Andrew Bailey as possible, whom she now blames for her truncated premiership. Some 40 Conservative MPs have demanded a review of the Bank of England and are proposing returning rate-setting powers to the executive.

But perhaps the rage of the far-right says something: politicians are so scared of devolving power, that they will instrumentalise whatever policy is available in pursuit of popularity – whether the decision is sound or not.

That, I think, is enough of a case to start considering an independent tax-setter.

Image: U.S. Embassy in U.K.

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