Reform property taxes, says the IEA’s Head of Health and Welfare Dr Kristian Niemietz

Catherine McBride, Senior Economist for the IEA’s International Trade and Competition Unit, would axe the Bank Corporation Tax surcharge

Scrap Inheritance Tax, argues James Price, Campaign Manager at the Taxpayers’ Alliance

Tax doesn’t have to be taxing, as those jolly HMRC adverts would have us believe. But given the length (10 million words and counting), and extraordinary complexity of Britain’s tax code, it inevitably does.In practice, poorly-designed taxes can depress economic activity and exacerbate social problems. They can distort human behaviour and business decisions in perverse and unforeseen ways. In some cases, growth-stunting taxes end up reducing the overall tax take, on top of their other harmful side-effects. Many would agree that our tax system is in need of radical simplification , but where to begin?On our debate blog this week, a group of free-marketeers give their pick of the most harmful taxes in contemporary policy. If you were in charge of the Treasury for the day, which tax would you axe?The UK’s system of property taxation is extremely complex, distortionary, arbitrary and inefficient. For a start, there are simply too many property-related taxes: Council Tax, Business Rates, Stamp Duty, and insofar as they relate to property wealth, Capital Gains Tax and Inheritance Tax. They should all be rolled into one, in a revenue-neutral way.More importantly, they all tax a package. They (clumsily) tax the value of land, but they also tax improvements to that land, buildings, and the activity that takes place on it. Only the unimproved value of the land should be taxed, because this is the part of the package that a landowner cannot influence, which means that taxing it does not change their behaviour. Whether they leave their land derelict, or put it to the best possible use – their tax bill would be the same.The revenue from this Land Value Tax (LVT) should be retained locally, and local authorities should be given much greater autonomy over their infrastructure policies and the provision of local public goods and services.This would radically improve incentives. It would lead to a more efficient use of land, more and better housing development, a more efficient use of the existing housing stock, more business investment, and greater accountability in local politics. What’s not to like?At a time when all other UK industries are seeing their corporation tax rate lowered to just 19%, the UK has decided to increase taxes to 27% on one of its largest and most profitable sectors. Indeed, it is the only G7 economy that targets banks in this way.The Bank Corporation Tax surcharge was introduced in 2016, and imposes an additional tax of 8% on banking profits above £25 million. This applies to all banks, building societies and controlled foreign companies, and has increased the total amount of corporate tax paid by banks last year by 23% – from £4.8 billion to just under £6 billion (plus a further £3 billion for the Bank Levy, which is a tax on UK banks’ balance sheets).The surcharge has harmful repercussions. It pushes profitable UK banks into a higher tax rate than many other EU countries, including Luxembourg, Ireland and the Netherlands, countries, incidentally, where many London based banks are establishing EU offices so they can operate post-Brexit in the event of a ‘No Deal’ outcome. With the 8% surcharge, a profitable bank in the UK could be paying more than double the Irish corporate tax rate. It would be an extraordinary own goal by the government if banks decided to stay in Ireland for tax reasons, even if the UK and EU reach a deal.What’s more, the main prize in bank taxation is not in the corporate taxes but the PAYE taxes which came in at a whopping £18.4 billion last year, more than 3 times the corporate and surcharge taxes. Why would anyone risk losing these payments for the sake of an additional £1.1billion?While many see extra taxes on the financial sector as justified by the bank bailouts in 2008, it simply cannot make sense to tax profitable companies more in order to pay for propping up those that are badly-run. Since 2007, the banking sector has paid over £220 billion in taxes including £14.5 billion for the Bank Levy and £3.4 billion in a one-off tax on bonuses in 2010.The four banks bailed out by the government in 2007/8: RBS, Lloyds, Northern Rock and Bradford and Bingley (B&B), are already repaying the support they received; Lloyds completely, while B&B and Northern Rock have repaid 76% of the government loans so far. Even RBS is finally making a profit.But the many new banks that have started since the 2008 crisis, under a much stricter regulatory regime, as well as the banks that did not require government assistance during the crisis, should not be penalised with this surcharge. Though the surcharge only applies to profits above £25m, it still hits many small, innovator and/or disruptor banks in a sector where the UK has excelled in recent years.HMRC should be encouraging more competition in the financial markets – not discouraging it with additional taxes.Like most, if not all, taxes, inheritance tax (IHT) has distortionary effects and unpleasant unintended consequences. However, it also has the dubious honour of being the most unpopular tax in the UK.Firstly, those negative side-effects. Various exemptions, for example on heritage assets or agricultural property, provide incentives to prompt people to buy, sell or otherwise act to avoid paying tax, to the detriment of other considerations about sound investments.Similarly, a higher threshold on primary residential properties encourages people to invest in their house rather than other assets, adding to the inflationary pressures on the housing market. Of course, all of this is largely only relevant to those who can afford financial advice; such tax planning means that those who end up paying IHT are those who don’t feel they could afford such advice, or those who have suffered a sudden and unexpected bereavement.But the reason IHT is the most unpopular tax isn’t because the rich can get around it with clever tax wheezes, or even because of the inefficiencies it causes. Saving up to pass on something to the next generation of one’s family is the most natural feeling there is for many people. Of course, socialists see supporting one’s family as good only up to a point, after which it becomes nepotistic and at the expense of equality in wider society.But most Brits ( 59% according to a 2015 YouGov poll ) deeply reject these arguments for ‘progressive’ taxation when it comes to IHT. Perhaps this is because, seeing a greedy Treasury imposing a fresh levy on a grieving family, using the source of their grief as a pretext, people see the hunger of big government for what it is; a leviathan that even death will not stop.