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Short-term tax rises are not the answer

Short sighted tax rises which generate relatively minor tax yields and store up a much bigger problem for the future, should not be the go-to solution.

The Government might be eyeing up longer-term structural changes to the tax system (and pensions relief might be in that category) but doing so now would be a huge gamble.

It is likely that any changes announced in the Budget will ‘pave the way’ for a bigger announcement in the spring.

Inevitably, tax rises are now being mooted and there is much speculation that the forthcoming Budget will bring sweeping changes. Only recently, the chancellor was seen to be carrying a draft speech setting out possible tax rises. This has heightened the anticipation of a change to the tax rules.

The immediate focus appears to be on capital taxes, with inheritance tax and capital gains tax under the spotlight. Both these taxes bring in very little revenue, at £5bn and £10bn respectively, and so any change will barely make a dent against the estimated £2tn debt pile.

There has also been speculation of pensions relief reform. At an estimated cost of around £21bn, this is more than both inheritance tax and capital gains tax combined. Given the Chancellor’s ‘leaked’ speech made reference to the tax changes being short-term only, it is not clear what the ultimate benefits of such a change are and the Government must be mindful of the long-term effects of dissuading people for saving for retirement.

The tax system is only partly about revenue raising – the rest is to control and direct behavioural responses (such as the recent Stamp Duty Land Tax holiday). What message is being given to a generation if pensions relief is slashed? What will happen in 30 or 40-years’ time when those individuals reach retirement age?

An alternative to tax rises which others are mooting is to simply rely on inflation to devalue the debt and use cheap borrowing (for now) to bridge the gap until the economy stabilises. Tax will have a role to play, but it should not be to discourage investing for the future. The challenge for the Chancellor is to find the right balance where the tax regime encourages higher volumes of investment, savings and business activity, which in turn generates higher tax liabilities.

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