Rachel Reeves was today urged to wrap looming Budget tax hikes in wider ‘reforms’ to reduce public fury.
The IFS think-tank suggested that the Chancellor should implement significant reforms, such as eliminating the council tax and introducing a property tax, to avoid appearing as if she is merely exploiting Britons for revenue.
Ms Reeves is poised to impose another wave of increases on November 26 as she struggles to fill an estimated £30billion black hole in the public finances.
The ‘wealthy’ are expected to be targeted, with fears Ms Reeves will slash pensions reliefs and freeze tax thresholds again.
Speculation has been swirling at Westminster about an ‘exit tax’ for rich people who opt to leave the country.
However, Treasury veterans suggested the idea would be viewed as ‘appalling’ by officials and strongly resisted on the basis it would deter entrepreneurs from coming in the first place.
The IFS think-tank said Chancellor Rachel Reeves should make fundamental changes – such as abolishing council tax and replacing it with a property tax – so it does not look like she is simply milking Brits
IFS director Helen Miller said the Treasury should look at abolishing council tax because it was ‘ludicrously out of date and regressive’.
Instead there should be a ‘proportional’ property tax that would also replace stamp duty, creating ‘winners’ as well as ‘losers’.
‘Look back at the last Budget, the Chancellor did a big tax increase, there were only losers – it’s not clear that went down wonderfully,’ she told BBC Radio 4’s Today programme.
‘The thing about reform is that you could have some winners. Therefore there would be someone who liked what you did.
‘More importantly, if you did a reform approach there is a good news story there. You can say you are doing something for a principled reason to make the system better, to make us all better off ultimately.
‘Again, at least you’ve got some good news to go alongside the inevitable upset that’s going to happen when you raise taxes.’
The IMF has also urged an overhaul of property tax, and Treasury sources acknowledge it is being ‘considered’ for the Budget.
That would go some way to appease Labour MPs who have been baying for so-called ‘wealth taxes’ to fund more spending.
However, it would potentially mean households paying thousands of pounds a year, depending on the exact shape of proposals. Critics have warned that people in areas where prices are high, such as the South East, and pensioners on fixed incomes would be particularly hard-hit.
Last year the Tony Blair Institute proposed a levy worth 0.5 per cent of the value of each property, to replace council tax.
The think-tank suggested a minimum payment of £1,350 for properties worth less than £270,000, and a maximum of £6,250 over £1.25million.
The report estimated that 4.1million people in larger homes would end up paying significantly more, although 12million would have lower bills.
The change was praised as potentially boosting growth by giving an ‘incentive for older homeowners in high-value properties to downsize’.
Separately, tax expert Dan Neidle said recent departures by prominent entrepreneurs had raised questions about what charges they should face.
He said the UK and Italy were the only two major economies that did not have an ‘exit tax’ – with the US imposing a capital gains levy when people renounce citizenship or green cards. France has a 30 per cent charge on unrealised gains.
However, in an article weighing up the options Mr Neidle – who runs the Tax Policy Associates campaign group – cautioned that entrepreneurs could be ‘less willing to come to the UK if we have an exit tax’.
They could also be incentivised to ‘leave the UK at an earlier point than they do now’ to avoid gains in the value of their assets being caught by HM Revenue & Customs.
In its analysis ahead of the Budget, the IFS warned the Chancellor against imposing a permanent wealth tax, saying similar attempts have failed around the world.
But it suggested a ‘one-off’ raid would be far harder for the rich to dodge as they would have no opportunity to move their assets.
‘While there are serious drawbacks to a recurring wealth tax, a tax based on an unexpected and credibly one-off assessment of existing wealth could in principle be an economically efficient way to raise revenue,’ the report says.
The Treasury last night refused to rule out a one-off wealth tax when asked if the Chancellor was considering implementing the proposal at the Budget.
Supporters claim a 2 per cent charge on assets of more than £6million could raise as much as £10billion a year. The Chancellor has signalled she is not in favour of a permanent wealth tax.
The think-tank urged Ms Reeves to consider other options if she feels the need to clobber the rich.
Ideas floated include increasing levies on the dead – the report says ending the current capital gains tax exemption on the assets of the deceased could raise £2.3billion a year.
Raising rates by 1 per cent on inheritance tax, dividends and interest could raise a further £1billion.
The report suggests Ms Reeves could raise £1.3billion a year by forcing working pensioners to pay national insurance for the first time – but warns many could decide to just give up work.
And it suggests the Chancellor may be considering a new ‘levy’ on income to fund increased spending on defence and the NHS in a way that does not directly breach Labour’s manifesto.
Today’s report warns against cutting pension tax relief for high earners, saying the idea ‘should be avoided’ and that it could hit millions of public sector workers like nurses and teachers.
However, the study says rules allowing people to withdraw 25 per cent of their pension pot as a tax-free lump sum are ‘ripe for reform’. Ideas include capping withdrawals at £100,000.
