December 2014

The UK tax system is incoherent. Even ignoring benefits styled as tax credits and the withdrawal of child benefit, taxpayers can face seven different marginal rates of personal tax. In the long term, aiming for significantly lower levels of government spending could facilitate substantial marginal tax rate cuts, and the government should aim to return to a tax system with two, or preferably one, overall marginal rates of tax on income. The benefits system should be reformed to replace most benefits by household tax allowances that depend on household size and composition with a ‘negative income tax’ being received by those households earning less than their combined allowances. This would substantially improve work incentives and end the discrimination against single-earner households and family formation in the UK tax system.