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Mirrlees: Tax system distorts behaviour

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The UK’s tax system falls short of the ideal ‘in costly and inequitable ways’, according to the Mirrlees Review released by the Institute for Fiscal Studies.

‘It discourages saving and investment, and distorts the form they take. It favours corporate debt over equity finance. It fails to deal effectively with either greenhouse gas emissions or road congestion. The revenue it raises, and the redistribution it does, could be achieved in less costly ways,’ said Sir James Mirrlees.

Failure to reform imposes enduring costs, he added. The review recommended several ‘radical changes’ including the merger of income tax and NICs, the extension of VAT to nearly all spending, and an exemption for savings interest.

‘The tax treatment of employment, self-employment and corporate source income should be aligned,’ it said. Corporation tax is ‘not properly integrated’ with personal taxes.

‘Tax systems that distort people’s behaviour by treating similar activities differently without very good reason – as the UK system currently does – create inefficiency, complexity and opportunities for avoidance,’ it added.