Stuart Adam et al (eds), Dimensions of Tax Design: The Mirrlees Review, Oxford University Press for the Institute for Fiscal Studies, 2010, xii + 1347 pp, hbk, 0 19 955375 4, £90
Stuart Adam et al, Tax by Design: The Mirrlees Review, Oxford University Press for the Institute for Fiscal Studies, 2011, xvii + 533 pp, hbk, 0 19 955374 7, £45 (both volumes £110)
Fiscal Studies , vol.32, No.3, September 2011: a special issue on the Mirrlees Review
The completion of the Institute for Fiscal Studies’ review of taxation, chaired by Sir James Mirrlees, Nobel Laureate and proposer of a theory on optimal taxation, has given rise to three valuable volumes.
Dimensions of Tax Design contains thirteen papers given at conferences organised as part of the review, along with numerous associated commentaries. It would be difficult to envisage a more comprehensive discussion of UK taxation policy, and even if there had been no outcomes of the review beyond this collection of papers, then the review would still have been worth conducting.
Of particular interest to readers of this Newsletter will be the paper on ‘Means-testing and Tax Rates on Earnings’. Unfortunately, the paper starts off badly, as it suggests that there is ‘a trade-off between the goals of equity and efficiency: governments want to transfer resources from the rich to the poor; on the other hand, such transfers reduce people’s incentive to work’ (p.91). This is patently not true of Child Benefit. It is only true of means-tested transfers. The rest of the paper is better informed, and, on the basis of the evidence, it recommends that ‘marginal rates … when people enter work should be set low (and perhaps even negative) for potential low earners rather than set high as the standard model suggests’ (p.91). The authors recommend a scheme which looks rather like Universal Credit (pp.150-62). Also of interest will be the papers on labour supply and taxes, on the tax base for direct taxation, on administration and compliance, and on the political economy of tax policy.
Nowhere in the collection is there any discussion of Child Benefit. This is a major omission.
The review’s conclusions are contained in Tax by Design, the title itself suggesting that a piecemeal approach to taxation policy needs to be replaced by a more co-ordinated approach. Of particular interest will be the chapter on integrating tax and benefits, which can’t find a good word to say about either our current benefits system or Tax Credits. Again, there is no mention of Child Benefit. The authors propose that Income Tax and National Insurance Contributions should be integrated, that benefits should be integrated with each other, and that tax and benefits should remain separate but their behaviours studied together. These suggestions reappear in the report’s final conclusions, as does the suggestion that effective tax rates should be lowered for low earners. ‘The current tax and benefit system is unnecessarily complicated and induces too many people not to work or to work too little. By creating a simpler and more rational system, minimizing disincentives where they matter most, the reforms we propose have the potential to deliver major economic gains’ (pp.483-4). Yes; and to have asked about the current effects of Child Benefit, the likely consequences of increasing its value, and the likely effects of extending universal benefits into working-age cohorts, would have enabled some even more important overall effects to have been achieved.
The September 2011 edition of Fiscal Studies repeats the recommendations contained in Tax by Design. It contains a comparison of Tax by Design with the Meade Report of 1978 and with taxation reviews in Australia and New Zealand (where government sponsorship of the reviews has resulted in less radical proposals but ones which might have more chance of immediate implementation); and a comparison of Tax by Design with recent literature in the field. It also contains an article which employs Tax by Design’s systemic and revenue-neutral approach to question some of the report’s conclusions, including its suggestion that effective tax rates should be lowered for people potentially or actually in low-paid employment.
We are in the review team’s debt for their committed work on a wide-ranging review. The two volumes and the September edition of Fiscal Studies will inform debate on tax policy for many years to come. However, one omission does need to be remedied. The Mirrlees Review did not review income maintenance, and it should have done. In particular, there is no study of the different effects of contributory, means-tested and universal benefits, nor of the ways in which they interact with each other and with the tax system. We now need to see income maintenance tackled by a review team with the same level of expertise and the same resources as the Mirrlees Review.