Transcript: Talking Tax podcast - Episode 1: Is it possible to have a sensible debate on tax?

Barry Murphy [Chair]

Hello and welcome to this first in our new series of podcasts on the big issues in Tax right now. I assume as you are here, tax is a topic of interest to you, just as much as it is to me. So stay with us.

I love tax but I’ll declare my hand, I am an accountant and Tax advisor, but I love it because whether it’s the price of breakfast, the cost of a train ticket, the availability of buses and trains, footballer’s wages , the cost you replace to live, how we save for the future, or how we refurbish the local playground, tax touches everything, but it’s a Marmite issue, everybody I ask says, everybody else isn’t paying enough and everybody else should probably pay a little bit more.

Let’s talk about the unfairness in the tax system, who is making the rules for whom. We want in this podcast series to get into the broader debate to get beyond some of the screaming headlines and get some engagement going, on the hot topics of the day, but first, today we are going to have a look at tax policy, how are the rules made, what could we do better?

My name is Barry Murphy, a partner here at PwC, and I am delighted to be joined today by Jill Rutter from the Institute for government and Kevin Nicholson, Our Head of tax.

Jill, if I turn to you first, the Institute for Government, you just authored a report on tax policy making it better, some clear views in there, do you wanted to start us off with some of those views?

Jill Rutter

So what we did in our report, we published with the Chartered Institute of Taxation and the Institute for Physical Studies, last January, we set out what we called ten steps towards better budgets, we are actually quite pleased because the Chancellor by the time we published, had actually taken the first one, which was to announce that he was moving from effectively two budgets a year, back to one, I am going to see that in November with the autumn budget, we set up other mechanisms.

Yeah, what did we hear? We heard lot of complaints, about just the share proliferation of measures, made it for different to understand what was going on. Lack of strategy, lack of underlined principles, so quite difficult to work out, why and how the different measures, all hung together.

We were concerned that lots of measures actually make it into the budget, which the treasury would knock out at first base, if they came through spending measures from departments, there is quite poor parliamentary scrutiny, finance bills, that these big door step of bills, that come out every year and actually pretty scan scrutiny of anything except a few headline, political measures, nowhere attempt to evaluate, whether the measures that are introduced have the right impact and interestingly when you ask officials and parliamentarians, why that happens, they usually say because actually they are last long enough to do a decent evaluation because, they have superseded by something else quite quickly to another problem, in itself.

I am finding we should actually, chancellors find themselves boxed in and we had a series of budgets they run unravelled really quickly and one of the things we think, quite a big problem is we don’t have a very good public debate about tax policy, as you said, yeah, we have screaming headlines is all done through the mega phone is based on really quite poor understanding of who pays what, how we pay and how we have to pay and we have election after election, where people try to duck some of the big tax issues, so we think there is a really good case for actually looking the very closed way, there is sort of you know treasury/HMRC monopoly on tax and tax policy has got in to say can we have better public discussion about tax.

Barry Murphy [Chair]

That’s a pretty hard hitting set of views, in terms of how we are making policy today and how broad were those views that you took on board and coming up with those views and recommendations?

Jill Rutter

So how broadly held, pretty broadly held actually, I mean the reason we partnered with the CIOT was we wanted to make sure we got the views in, of the tax professionals, Institute of Governments addressing more effective government, we are not tax professionals, so this time someone has worked from the tax of the treasury, we also have the IFS, because IFS here is leading independent think tank on that, so they really bring in the economic view and what we didn’t do is represent the public but I think when we went out, we found a pretty broad coalition of people supporting their measures and actually quite a lot of technical measures Treasury and HRMC themselves support, some of the other ones they are not quite there yet, so we should bring them along.

Barry Murphy [Chair]

Okay, so quite a lot to do, but tax is been running for a long, long time, Jill and Kevin, Kevin why now, why the focus on debate on tax and tax policy now?

Kevin Nicholson

Well I think there has never been a time, when we shouldn’t have had that debate but actually but I will come back to the real why now which probably links in to Brexit, but you know Jill's really set out some of the challenges very, very well and all of the discussion is around short term tax changes, tinkering with the system and it is kind of understandable, why because politicians are relatively short time skills, there is an election every four or five years, they need to get re-elected, every policy change, that Jill’s described has winners and losers, and the losers shout very loudly, so we think, I think that, we need to start looking further ahead and start developing road maps around, what’s the tax system at the future that we really want and start that thinking now, because you know regardless of the next election result, the one after that or even the result at Brexit, we know we are going to have to raise tens, or billions of pounds in the future, so how are we going to do that,  you know if we have got fewer people in full time employment because of the xxx economy, or automation, roughly, half of the current tax take comes from employment taxes, so how are you going to replace that, as we move to a more greener economy, get rid of petrol cars, diesel cars, who is going to replace this 35 billion pounds of xxx (5.39)and how we are going to replace that, so I think the thinking has to start now and the real reason now I think very important is, that was a kind of theoretical discussion, the treasury would say very interesting come back next year, come back next year. Now with Brexit, we will have to start developing a tax system for ourselves in the UK, so that those decisions, that discussion has become a reality.

Barry Murphy [Chair]

So some interesting talks in there on road maps, setting out strategic direction as one of the recommendations here, has there been evidence of that working so far?

Kevin Nicholson

Well I mean people I would always say it’s a bit idealistic, but there is actually a real example, so corporate Tax reform which Gordon Brown, actually kicked off, when he was chancellor, and the coalition government developed it, added to it, the conservative government continued it with “Britain’s open for business”, that was a pretty consistent view around lowering the headline rates of corporation tax encouraging business to the UK, they employed more people, they spent more money and the tax take went up, there was something that actually was a road map, clear road map, political parties got behind it and it broadly worked.

Jill Rutter

I want to actually add another example which is tax-like but not tax which is the way we are going to about trying to increase pension savings which goes back to the establishments of the Turner commission on Pensions back in mid-2000's. They did put a lot of effort in the big evidence space put that evidence space out there and said, “ Do you agree with us that this is the problem,” then they went out and actually built consensus and built consensus across parties on this might be the solution.

So we actually ended up with the policy developed under the Labour government of gradually rolling out automatic enrollment, we are bringing out smallest employers now, and actually creating a basis where you could sustain change over a changing government, and actually if you can work for Pensions which are pretty tax like, then I think it could work for tax. One of the things it was really interesting, when we did a session on the attorney commission institute for government was the James Purnell who had been one of the labour ministers then said, what was really interesting about the Turner commission was something that was unthinkable in the department of working pensions where he was a minister, which was raising the state pension age, went from being the front page news to something where we have now given it to the former director general of the CBI and regarded as a completely technocratic exercise, where do we set the State pension age.

So we have actually changed the terms of the debate and I think that’s one of the things we need to do on tax and we can do that by actually thinking reform as a long term process, not as something where the window for reform is between one budget and the next and that’s all going to be cooked up inside the Treasury and HMRC.

Barry Murphy [Chair]

That’s a brilliant take on pensions and in the beginning you said in the engagement in your report, the public you did not go out for the broad consultation and I would like to move to that topic now, in terms of public engagement, so on one sense, what I hear is public are locked out, out of lot of this, it’s a private conversation, I have heard you talk about tax before in that sense, but also some of the U-turns of the budgets that we don’t like seem to be as a result of public getting involved.

So is there enough public engagement, what do we need to do what’s different, what has to happen differently?

Jill Rutter

So I think what we would do is we try to do reform, but we would do it in a sort of rather cack-handed way, so chancellors are addicted to what they call is Budget rabbits so yeah everybody is debating, the treasury is briefing before a budget that’s there going to be a big rabbit so we are all on the rabbit watch, the chance to bring something out inevitably if its rapid there hasn’t been a huge amount of laying the ground rule, so go back to what I was saying just about the Turner, you know there is no setting out the evidence, why is this reform needed? Why does this makes sense? How is it fitting with wider things really interesting discussion remember the Nicks change on the self-employed, this is really a bit of sequencing problem by the treasury, they changed, made lots of positive changes self-employed but they did it before they made the thing that said basically you are now getting very similar benefits to employed people, is it now time you pay tax a bit more like employed people so because they lacked this strategic approach, they saw this as a comprehensive reform and introduced in stage in a sensible way, they actually found that one element everybody was focussing on whether the whole bunch of losers here and as Kevin said that one thing you know if you are in the treasury is, the gain is just pocketed and say thanks very much and you know that’s fine, move on, the losers all scream at you and so I think much better preparation, fewer changes which are better thought out and better prepared changes are the way forward, and actually make the case, get the case out there, so it’s really interesting on the National Insurance change in the budget, lot of people valiantly came to the aid of the treasury, the resolution foundation headed up by former Ed Miliband advisor, the IFS, we were all out there, saying this is a sensible minor change it makes sense in terms of tax policy and etc.

But actually there will be nothing done to build the public case for it and at the same time, in a different part of the forest, the prime minister commissioned Mathew Taylor to go off and look at the gig economy. If you are going to do a reform, you know the National Insurance self-employed you waited till after that report, not do it beforehand.

Barry Murphy [Chair]

Okay so rabbits, forests, wood for the trees I am hearing. (laughing)

Jill Rutter

Metaphors, metaphors central here!

Barry Murphy [Chair]

But some very, very important topics in there, that point above winners and losers.

Kevin, isn’t there a case that if there is more public debate what we will just see is more headlines from those who perceive they are going to lose whether it is at the start of strategic change or later on, now we won’t get anywhere, what is your view on that?

Kevin Nicholson

Yeah to be honest with you that is kind of where I started in more thinking but where we, in PwC, we started to say how could you look to the future and start to develop that debate and we called it a paying for tomorrow, campaign or paying for tomorrow.

One of the first thing that somebody said to me was, if all you do is go and talk to the same people the men in suits, as they described it, you will end up with the same answers, you have to engage differently, so we worked with Britain things and actually went out and had citizens jury, so this was the cross section of the public brought together by Britain things.

And we spent two days I think it was they spent learning about tax, NGO's, talking to them, tax professionals and politicians and at the end of that came up with summary of their report, one of the really interesting things that we found was that people don’t come out of it from self-interest once they understand the issues, they will coalesce around what they think is right or wrong. So good examples inheritance tax, the citizen’s jury all of them thought that inheritance tax was a bad tax, once they understood it, even though we pointed out none of them would have to pay it, they were all under the threshold.

So it showed us that actually people don’t just commit it from self-interest similarly when we worked with business and jury from the smallest start up right through the multinationals, they all said that they would quite accept the simpler system with fewer reliefs, if it made it easier to understand the tax impact the business decisions, even though they admitted that all of them were benefitting from the reliefs, so I think if you engage, take the time to take people with you they will come to the decisions they feel are fair even if it isn’t in their self-interests.

Barry Murphy [Chair]

Okay, so clear case for better public engagement, there is the case where it’s been tried, it worked, pensions example another is, but, is it on the agenda of politicians and government at the moment?

Jill Rutter 

I think it’s really interesting because if we look at the Parliamentary arithmetic now, it’s very clear that Chancellor is quite badly boxed in. He could not sustain the National Insurance change when the conservatives had a majority, the government of the election is now dependent on the DUP, so this is not a time, I think when the treasury can embark on major reform particularly, when it can’t do the thing, you can do with tax reforms, which is basically you ensure no losers and you should manage make your reform when you have got lots of money to go around, treasury isn’t in that position we just seen the OBR revising down some of the potential forecast for the Budget and in that physical outlook, so what I think the treasury should do and Philip Hammond should do, is actually use the opportunity of the fact that they can’t do the major reform to start laying the ground work, for actually, what do we want the tax system post Brexit to look like, they are not going to make those changes now, but you can do that and I think it’s really interesting example when we did our report on tax policy making we looked at New Zealand. New Zealand basically spend around 10 years in denial of about the effects of the UK joining the common market as then was and losing their big markets.

By the mid 90's they realised they had to do things differently, one of the things they did differently was realised that they have to make the tax policy differently, so they actually engaged quite widely, got a bunch of people from outside to develop what they called their generic tax policy process which is a very different much more open, much more strategic way of making tax policy, say that to treasury officials, say that to people there they say, " well that’s fine New Zealand is a very small country it doesn’t work here,” but actually it’s really interesting if we couldn’t use this time to build a bit of consensus about, how do we use some of the new freedom of some flexibilities we have, but how actually do we make the simplicity of the British taxes from a potential selling point, as we want to go forward and compete in a post Brexit Britain.

Barry Murphy [Chair]

That’s very interesting, you know the attitude to New Zealand or how it could influence UK tax policy, so what’s the likelihood in 10 years’ time will we be having the same podcast, having not moved forward, Kevin?

Kevin Nicholson

Well I would say, its, normally I would say it’s very likely but I think Brexit brings a different dimension to it, I think that means this theoretical discussion probably has to come into reality and change will have to happen, just on the timeline in 10 years you know one of the things you know I think we should do is bring Tax and Pension discussions into the school. I think as people are ready to leave out into employment or further education, just talking to them about what tax is, how there payslip will look, why they need to save for pension. Part of that broader education is vital and it will take a long time but it will start to help educate, so that the people will come into employment, move on to the ladder of life with some understanding of tax and that will make the debate much, much easier.

Barry Murphy [Chair]

So that’s a tangible thing we can do with schools, but before we get on to may be some more practical measures, that aspect came out some recent polls that into generational divide or difference, do you see that would come through in the tax debate as well as we go towards wider public engagement?

Jill Rutter

I think to be fair to the government actually that was one of the things that government was actually trying to do, in the election with it’s brief foray into how do we pay for social care, what to do, who should pick up time for that? We are now promised a review of how we fund universities.

So I think these issues are sort of starting to come through, what we don’t really have is anything looking at these issues together, one of the problems that we have on the tax system is we don’t actually think of it as a system, we don’t reform it as a system, we sort of knock off individual bits and actually as Kevin says here is quite interesting, one department is responsible for pensions, pensions savings and other ones tax policy on pensions.

So I think we have a lot to do to join these things out better but Michael Gove when he was talking about Brexit and environmental policy said that, this was Brexit representing an unfrozen moment, where lots of things that we have been just taking for granted for last 40 years and were now up for debate again.

So let’s say let’s turn tax again because the EU has had lesser role on certainly on direct taxation then before, but I think this is a really good opportunity to say actually, do we do these things in a sensible way? Chancellors after chancellor, the other bit is the politics, chancellors after chancellors must be looking at what they previously saw was there occasion to make a big political statement and enhance their career and look and say, these things are serially destroying chancellor careers, is that really the best way of doing things? Just for sheer politics, do I want to implicate a few more of my colleagues in this, don’t I want to actually try and broaden the support for the measures, and you know, is this really working for me anymore? And I am not sure it is.

Barry Murphy [Chair]

So some clear advice there in known political self-interest, benefit of the system, get more public engagement going, if I start to bring it down to some key recommendations from both of you may be, Kevin if we start with you. What would your advice be to policy makers now? What would you say focus on these key issues now in priority to others?

Kevin Nicholson

One thing I would do actually, now is not my personal view but I was supported and was came up from a Citizen’s Jury actually, which was that if we are going to set long term policy, the government of the day have to be held to account, and why not set up an independent body, a bit likely will be OBR is actually, which holds the government to account to say, are these policies you are announcing in the budget taking us closer to the roadmap that you have set out of further away and holder to counsel, so not setting the policy itself but actually holding the government to account on that policy and I think the other thing we need to do and the Mathew Taylor report was a good start, is actually look at the whole area of how we tax employment, as employment changes, as the gig economy comes in, people have multiple jobs, not one full time job and as I said early you know 45% of our current tax revenues has come from employment taxes, that isn’t sustainable and so I think that is a good place to start if we are developing the road map, we had a corporate tax road map, we actually have the personal tax, employment tax as road map.

Barry Murphy [Chair]

Is your employment tax as road map some more holding to account? Jill for you?

Jill Rutter

I would do that, I would set up series of public reviews of the parts of the tax system designed to sort of come together to actually go out assemble and communicate the evidence base of who actually pays what, awful lot of misunderstanding and I mean tax really is the province of lot of professionals, economists understand things like who actually really pays things, like corporation tax.

How the changes in the economy are going to affect that tax base going further things, Kevin was saying at the start and actually then try and generate a genuine public debate about what the best ways of collecting tax for the future because if we don’t collect the tax we can’t have public services that people want.

Barry Murphy [Chair]

Jill, Kevin I would like to thank you for that lively discussion on tax policy and how we can do it better, seems like there is certainly a case for change, it looks like change might be in the wind, I would like to thank everybody for listening today and for future podcasts please hit subscribe and the rate and review button. We would love your comments on this issues as well and we will be picking up on some of those topics and recommendations that you heard today in the future of the series.

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