In 2010, a team of economists led by Sir James Mirrlees published a report for their review of taxation known as "Tax By Design: The Mirrlees Review". It provided research and suggestions on the taxation system of the United Kingdom to turn it into a system that is progressive, neutral and holistically designed in conjunctions with a benefits system. I thought it would be good to look over the budget policies of the 2022 budget and see how it stacks up against that recommendations of the review, to see how far the tax system has come, and what is still needed in the future.

First and foremost, it's important to recognise the actions of past budgets. One of the more significant moves that the government has taken is the imposition of a carbon tax, which has been used to reduce the social cost of goods that cause pollution. In the review, it views the taxing of carbon as a great positive:

Raising the price of activities that cause harm can be an efficient way to discourage them because it ensures that reductions occur among those who find it easiest to make them. The major environment problems that ought to be priced are carbon emissions and congestion.

The 2022 Budget has expanded on this by increasing the carbon tax and nitrate pollution levy by £5 per year.

Previous budgets have also introduced a national land value tax, which has been widely praised by many economists as being a non-distortionary tax, and is a tax that the Mirrlees review highly recommends above business rates:

We are proposing to abolish the current system of business rates and replace it with a system of land value taxation, thereby replacing one of the more distortionary taxes in the current system with a neutral and efficient tax.

As well as above stamp duty on property:

In the modern era of broadly based taxation, the case for maintaining stamp duty is very weak indeed...stamp duty ensures that properties are not held by the people who value them most.

Another important addition was the taxing of dividends at higher rates, which was proportional to income tax, which was added in the first Rose government budget. As said in the report:

Income from all sources should be taxed according to the same rate schedule...Taxing income from all sources equally does not just mean taxing fringe benefits in the same way as cash earnings. It also means applying that same rate schedule to, inter alia, self-employment income, property income, savings income, dividends and capital gains.

The last other major addition to budgets is the implementation of dividend imputation during the Phoenix Budget. Dividend imputation is a mechanism where if there is any corporation income tax paid, dividends paid by the same company have a reduction in liable taxation to avoid double taxation. These mechanisms to reduce double taxation are backed by the report stating:

We should reduce the personal tax rates on corporate-source income (dividend income and capital gains on shares) by the same amount to reflect the corporation tax already paid.

The 2022 Budget made a significant amount of changes towards taxation and its structure, so lets go over them individually.

First was the combining of National Insurance and Income Tax. The Mirrlees Review frequently touches upon how the separate systems of National Insurance Contributions and Income Tax is "confusing", and in the recommendations section says:

We need to move away from having separate systems of income tax and NICs...National Insurance is not a true social insurance scheme; it is just another tax on earnings, and the [separate] system invites politicians to play games with NICs without acknowledging that these are essentially part of the taxation of labour income. The two systems need to be merged.

And sure enough, the 2022 Budget merged the employee contributions and the income tax into one system as shown here:

Source: Budget 2022 from HM Treasury

Another important change in the budget was the changing of the inheritance tax to a lifetime receipts tax, whereby any inheritence given to a person would be taxed throughout their life. The Mirrlees Review condemned the inheritance tax as tax that "favours the healthy, wealthy and well advised", and suggested the following:

The biggest barrier to the effective working of inheritance tax as it currently stands is that it is levied only at or close to death, allowing the wealthy to avoid it altogether by the simple expedient of passing on wealth well before they die. Put this fact together with the logic of such a tax, which suggests that a tax on the recipient makes more sense than a tax on the donor, and the case for a tax on lifetime receipts looks strong.

As I have mentioned before, the review condemns stamp duties as a tax due to its distortionary effects, and the abolition of it by the 2022 Budget is certainly a cause for celebration, especially with Land Value Tax as the replacement for wealth for it.

There has been a lot of progress with the Mirrlees Review to a more neutral, progressive and integrated tax system following from the last few budgets, but there is still a lot to be done. It recommends broadening the VAT base whilst reducing income tax to take it to account for those of lower incomes. It also recommends the complete integration of dividend tax and capital gains tax with income tax, whilst implementing policies to encourage saving in a non-distortionary way.

I hope that future parties will consider this heavily in upcoming budgets to properly address the UK taxation system that we have now, to make it better for generations for years to come.