The Commons Treasury Committee says that tax policy should bemeasured by reference to principles in new report.

The Government has said it is committed to a new approach to tax policymaking, designed to support its ambition for a more predictable, stable andsimple system. The report welcomes this commitment, but expresses concern thatthe Government has not done enough to set out the principles underlying thatpolicy. In this preliminary report, the Committee has endeavoured to identifythese principles and consider how tax policy can best support growth.

In this report, wehave endeavoured to create some common ground, with the intention ofencouraging greater stability in tax policy making. Our aim, as a cross partycommittee, has been to produce a number of tax policy principles, which areaccepted across the House. We intend to consider the measures contained infuture Budgets against these principles.

Findings

In the report, the committee discusses the principles separately, butnotes that a tax system which is theoretically structured to promote growth,that is, which has the basic principles right, will not succeed if businessesare faced with constant change, or if the inefficiency of collection outweighsany benefits. Moreover, it notes that even if they are stable, clearly targeted, and efficiently collected, taxes can reduce growth - for examplewhere the system contains incentives which distort economic activities.

The coherence of thesystem affects the basic principles of both fairness and growth-a system whichis riddled with anomalies will not be considered fair and will impair economicperformance. It also matters for the procedural principles of certainty,stability and practicability, since incoherence will make all of these harderto achieve.

The report warns that a tax system which is felt to be fundamentallyunfair will quickly lose political support. Although judgements about thefairness of policy details are politically contested and a major way in whichparties distinguish themselves from one another, there is a significant amountof consensus on fairness, and differences are often matters of degree andemphasis, it says.

The report adds that, although using taxation to support wider policy goalsshould not be ruled out, indiscriminate use of taxation may increase thecomplexity of the system and be counterproductive.

It also notes that the scope for tax arbitrage has grown substantiallyover the last quarter of a century and globalisation is likely to increase itfurther. A tax system which is not competitive by international standards will not support growth. Competitiveness is also not a simple matter of tax rates,although they have a bearing, but of the stability of the system as a whole.

Governments should bewary about using tax policy as a substitute for direct policy measures, doingso only after careful analysis shows it to be the most effective tool. Insetting taxes, Governments should be alert to the effects tax policies willhave on economic growth.

Conclusions

The report concludes that tax policies provide the framework for our taxsystem. The tax raised by these policies taken together funds the UK economy,it says.

The report recommends that tax policy should be measured by reference tothe following principles. Tax policy should:

be fair. The Committee accepts that not all commentators will agree onthe detail of what constitutes a fair tax, but a tax system which is consideredto be fundamentally unfair will ultimately fail to command consent

support growth and encourage competition

provide certainty. In virtually all circumstances the application of thetax rules should be certain. It should not normally be necessary for anyone toresort to the courts in order to resolve how the rules operate in relation tohis or her tax affairs

provide stability. Changes to the underlying rules should be kept to aminimum and policy shocks should both be avoided. There should be a justifiableeconomic and/or social basis for any change to the tax rules and thisjustification should be made public and the underlying policy made clear

the Committee also considers that it is important that a person's taxliability should be easy to calculate and straightforward and cheap to collect.To this end, tax policy should be practicable

the tax system as a whole must be coherent. New provisions shouldcomplement the existing tax system, not conflict with it

No tax system is, orcan be, static. There will always be trade-offs and difficult decisions; adesire for fairness may increase complexity; a desire for certainty mayincrease administrative complexity. Nonetheless, the principles our Reporttoday sets out, which reflect a surprising degree of convergence from theevidence we took, give a direction of travel which, in the long run, we hopecan both secure consent and improve the performance of the economy.