Select Committee on Treasury Minutes of Evidence


Examination of Witness (Questions 540 - 559)

THURSDAY 14 DECEMBER 2000

MR EDWARD TROUP

  540. Have you seen the codes put forward in this area by a number of professional bodies like the Institute of Chartered Accountants and the Chartered Institute of Taxation? Have you got any comments to make on that?
  (Mr Troup) I have read the ten points put forward by the Chartered Institute of Taxation. That is useful for focusing the debate. I have to say, without wanting to be too critical, I think they do not take into account political reality of policy making and of tax. They do not take into account the fact that there is no silver bullet to make the tax system simple. The tax system is complex and it will always be complex because the world is complex and we want the tax system to be fair. I think that they have promoted a useful debate. They do not go far enough in the sense that I do not think that they go close enough to the heart of the process to actually make a difference. It is all very well having those things out there but unless you actually have someone, a group, a body, within the Treasury or within the system somewhere which is required, as it were, to go through the codes and to weight decisions against them before decisions are made, and to publish a report together with the Budget, evaluating measures against that code, I do not think you will achieve anything.

  541. The Treasury has to publish reports on the compliance costs of particular tax measures.
  (Mr Troup) Yes.

  542. Do you think those reports are any good or are they just not worth the paper they are written on?
  (Mr Troup) I would not go quite as far as that. I do not think that they are terribly good because it is very difficult to measure compliance costs.

  543. They do not publish the methodologies, I believe.
  (Mr Troup) They do not publish the methodologies, partly because, with respect to the Inland Revenue and Customs, the people who have to prepare them, very often there is no better method of compliance cost assessment than sticking a finger in the air. Some of these have to be produced in an extraordinarily rough and ready fashion. Simple administrative costs is not the only issue here.

  544. All I am saying is there is a duty on them at the moment to produce these reports and they produce them, they are not very good, as you have just basically said, so one has got to work out if the new code is produced whether that will be any better. Will they just produce the reports, stick their finger in the air and say "well, it deals with a bit of complexity, well, it is quite transparent", but not actually deal with the real issue and make a real, significant attempt to quantify these things?
  (Mr Troup) That is clearly the risk. What I prescribe is a combination of a code and a centre of weight within the Treasury to effectively administer it. The problem with compliance cost assessments, or regulatory impact assessments as they are called now, is that they are largely afterthoughts given to the Inland Revenue. In other words, once the Government has decided what to do the Revenue are simply sent away to produce the numbers, they are not an integral part of the decision making, they are simply something which is tacked on. I think that is partly a reflection of the fact that they are left to the Inland Revenue and to Customs and Excise and not required to be made a central part of the ministerial decision making. Nevertheless, the point you make is a good one, that if ministers want to sideline any code they can choose to do so, but that comes back to the function of the committee and similar bodies, that with a public code, with a strengthened unit within the Treasury, the chances are that there would be better thought given to individual tax measures and to the coherence of the system overall.

Mr Beard

  545. Could I just clarify a point which is very interesting. You are essentially saying that there are several departments in the Treasury but it has not got a central nervous system, there is no central analytical policy making.
  (Mr Troup) That is correct. I am not that close to exactly how things are organised now. There clearly is a Budget and Tax Policy Unit, I am not suggesting that there is not, but if you look within that to try to find a group of individuals who fully understand the tax system and who understand the impacts of the tax system, who understand the economic issues, it simply is not there. It is very hard to find a group of people who you can sit down and have a coherent debate with about the tax system going from the broad principles through to detailed issues. Tax is about detail because ultimately it is about people writing cheques to the Government. That is what is lacking. As I say, the Treasury, and people I have talked to, are well aware of this and I do believe they are trying to address this. I will be interested to hear what your next witnesses say.

  546. What are they actually doing? The Treasury have said that they are putting emphasis on developing evidence based policy making.
  (Mr Troup) That is excellent.

  547. One wonders what is the basis otherwise?
  (Mr Troup) I think you may be aware, and I have said to this Committee before, a little bit more evidence based policy making in tax matters would be very welcome. It is extraordinary that there has not been evidence based policy making in tax. That is what the code should achieve. It should require policy measures that are put forward to be backed with evidence and to be backed with evaluation and predictions.

  548. Evidence of their consequences?
  (Mr Troup) Absolutely. Evidence that they are going to have some effect, some forecasting of what effects they will have, what deadweight costs they will have, what costs they will have, what economic effects they will have, and the extent to which they can be withdrawn in the future if, in fact, they do not work or, indeed, if they do work.

  549. How does this fit in with this concept of PSAs which are negotiated between the Treasury and the departments. Is that something that ought to be part of the PSA, because most of the consequences that are aimed for will be designed to help the policy of one or other department, will they not?
  (Mr Troup) I think that comes back to your question as to what tax policy is for. I think it is very easy for governments to—I will not use the word pretend—build up the fact that tax can do things other than raise money. The principal function of the tax system is to take money, 40 per cent, 38 per cent, whatever it happens to be, out of the economy. I think to regard tax policy as having a principal role in supporting another government department may be politically convenient because it makes tax sound much more attractive if it is helping British industry, but it is not really the reality of tax. Tax is about raising money and, therefore, it is a Treasury concern.

  550. But they have the other consequences and they are part of Government policy often.
  (Mr Troup) Absolutely, it does have other consequences, and I think it is important that those are given the right weight in policy making. Again, this Committee will be aware that my view after 20 years in practice is that very few tax measures have the policy result that they are intended to. It is very rare to find a tax measure which actually does what it was designed to do: to encourage the British film industry, to encourage profit related pay, or whatever it is.

  551. Is that surprising if there is no formal way of assessing what it is designed to do?
  (Mr Troup) I do not think it is surprising. If it were possible to effect a better evaluation then I think very few of these measures would actually have seen the light of day and the ones that did I hope would have been better designed and might have had some effect.

  552. Coming back to my point about the Public Service Agreements, the concept essentially is they will be negotiated between the Treasury and the department and subsequently those will be monitored by a unit to see what has been achieved. Where does your concept of this sort of central nervous system fit in? Is it an analytical group at the centre of the Treasury that takes all of these things and assesses them before anyone goes off and negotiates with the Ministry of Defence?
  (Mr Troup) I think it is very hard to introduce a Public Service Agreement concept into tax policy making at this stage—perhaps ever—because tax is so central to Government, the ability to raise tax is so much part of what Government is about, that to create an arm's length arrangement between the Treasury and someone else dealing with that would be very difficult. Again, this Committee may have heard in the past—not from me—that the logical extension of the approach to monetary policy is that we should have a tax policy committee within the aegis of some body other than the Treasury, rather akin to the Bank of England, which could simply be told at the beginning of each year "the amount of tax to be raised this year is to be 39 per cent of GDP, please go away and do it".

  553. And hang the consequences.
  (Mr Troup) And to account in some way as the Monetary Policy Committee does at the moment for interest rates. Now, I am not advocating that, and in a sense the fact that you quite rightly laugh shows how difficult it is to introduce a Public Service Agreement concept into tax. If a good code of tax policy was developed, and it could be seen to work so that ministerial measures were properly evaluated against it, and what was brought forward did take into account the criteria which were contained in that code and the need to balance competing results of the tax system, I could see some sort of PSA being introduced at a later stage but I do not think it fits very easily within that at the moment.

  554. Final question. How does this concept you are outlining fit with the responsibility of the Inland Revenue and Customs and Excise? What role would they play in this?
  (Mr Troup) The Inland Revenue and Customs and Excise are both charged by statute with the collection and management of taxes. There is nothing in their statutory powers which requires them to give tax policy, to take any part in tax policy. But de facto they are the principal tax policy advisers to ministers, which I think is not entirely desirable as a structural matter because I do not think it is necessarily a good thing to have government departments performing a role which they do not have any statutory duty for and are not responsible to the PAC for. I am not for a moment suggesting that they should not be involved in tax policy. A good tax is one which does take account of its collectability and administrative requirements, both of the collecting departments but obviously also of the taxpayers, Mr Davey's point about complexity and compliance costs. What has happened is that because of the weakness of the Treasury's central unit, the collection related issues, administrative issues, have become far too predominant in too many policy areas. You know what IR 35 is, that was driven largely by an avoidance concern by the Inland Revenue where there was no counterweight within the Treasury to say "Well, hold on, let us understand the wider ramifications". It is a good example of something where the Revenue had an entirely legitimate concern but they were too dominant in the policy making. You need Revenue and Customs people in the central policy unit informing the decisions because administration and collection is absolutely central to good policy making but they must not dominate. I think, to be fair, that if you talk to senior people in the Revenue they would not be unhappy with a unit which involved their people but had a greater degree of central coherence. I think that they find that they are required to give too much advice and, in a sense, do not have sufficient authority in the giving of that advice. Revenue and Customs have got to be involved, absolutely, no question about it at all. The balance between the collection and the policy making is an interesting one. What has happened in the US—where the IRS, which is purely a collection agency, and policy making is left entirely to the Treasury—where the IRS have run into some quite nasty problems in their own operations is an indication that you can take it too far the other way. You can effectively sideline the collectors too much in policy making and they can go off on their own with rather unsatisfactory consequences. Yes, they have to be involved but you have to watch the balance quite carefully.

Mrs Blackman

  555. Just sticking with the tax policy code for one minute. Does an effective one exist anyway?
  (Mr Troup) Not that I am aware of, but I have to admit that I have not trawled around to try and see what does exist. In the past I have tried to start to write down something which, as it were, bridges the gap between the very broadest statement "We want the tax system to be fair and efficient" bringing it down towards the detail. I think different governments, different systems, adopt different forms of checks and balances. There may be such a code somewhere, I am not aware of it, that does not mean we should not have one.

  556. No. I wondered whether there was something somewhere?
  (Mr Troup) Not that I am aware of. I plead ignorance rather than being certain there is not one.

  557. Okay. Just turning to the Pre-Budget process. Can you suggest any further reforms of the Pre-Budget process which would improve tax policy making?
  (Mr Troup) I think there is a feeling, which I agree with, that the Pre- Budget Report is not really a Pre-Budget Report but it has become a mini Budget. The idea of consultation I strongly support, and this Government has been very good on consultation, but I think that good tax policy making involves a number of stages: listening, deciding, consulting and implementation. That is to say that if you try and consult before you decide you will get so much noise that you will not be able to make a clear decision. There is partly the issue about secrecy. Because tax is something which involves taking something away from people, it is very difficult to go out and consult and say "We are thinking of reforming ..."—let us think of an example—"We are thinking of imposing an energy tax, what form should it be?" All you will hear is lots of people who effectively are saying "Do not tax me". People who might lose will complain, people who might gain will sit quiet. It is very dangerous to consult before you decide. The Pre-Budget Report should be a publication of ideas where, in broad principles, the decision has already been taken and what happens after that is consultation on the implementation. That seems to have blurred, we do not seem to have a Pre- Budget Report which does that. The role of Treasury, the role of a code would be to inform effectively the decisions which go into the Pre-Budget Report or the draft decisions. It does fit together quite well.

  558. Should there be more discussion in government prior to proposals which come through, do you think?
  (Mr Troup) As I have said already, secrecy, unfortunately, is a necessary part of tax policy, because if you simply say "We are thinking of doing something" the winners will keep quiet, the losers will complain and it will be very difficult to get it through. So you do need to make sure that before you make your decision in principle that you want to impose an energy tax of some kind, let us say, that you have had the best quality thought internally so that the decision you effectively have made in principle is as robust as possible against the criteria you have set out.

  559. Obviously some measures would not be open to consultation because of their own sensitivity?
  (Mr Troup) No. There are always going to be measures which have to be brought forward in the Budget as fait accompli. In a sense that is the principal reason for wanting a strong tax policy unit in the Treasury, to make sure that those measures which for quite good political reasons cannot be retracted—and I quite understand why a measure, even if the Chancellor may have privately acknowledged that it was defective cannot be withdrawn simply because of political pressure—it is those measures which have to be got right first time and it is those measures which recent experience has shown are not always got right.


 
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