This policy paper sets out a mechanism for improving the progressivity, efficiency and revenue raising potential of income taxes in the UK. It proposes a major reform of the current system, with two elements.
First, income tax and employee national insurance contributions would be combined into a single tax ‘schedule’, with all sources of income taxed at the same rate, and on the same basis. Second, the existing system of marginal tax bands would be replaced by a ‘formula-based’ system such that every taxpayer’s marginal rate would depend on their own precise level of income. The paper argues that such a system would be more efficient and progressive, and in addition could be used to raise revenues in a way that is fairer and more politically acceptable than the current system.