IFS Zooms In: The Economy How to fix income tax
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Oct 21, 2025 Stuart Adam, a Senior IFS tax expert, and Ben Zaranko, an IFS economist specializing in fiscal policy, delve into the intricacies of the UK's income tax system. They discuss the baffling two-tier tax structure and address the inefficiencies caused by cliff edges and frozen thresholds. The duo highlights how these issues distort work incentives and complicate financial planning for many, especially in the case of childcare subsidies. Moreover, they suggest merging income tax and National Insurance to simplify the system and enhance transparency.
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Tax Design Should Minimise Behavioural Distortions
- Taxes distort behaviour because people change actions to avoid tax, raising costs beyond the cash collected.
- Minimising behavioural responses should guide tax design for a given revenue and redistribution goal.
Aim For Neutrality In Tax Rules
- Neutrality means similar activities or people should face similar tax treatment unless there's a clear reason not to.
- Neutral taxes tend to be fairer, more efficient and simpler to administer.
Design Taxes For Low Cost And Transparency
- Design taxes to achieve chosen redistribution and revenue goals with the lowest possible efficiency costs.
- Prioritise transparency, low compliance burdens and horizontal equity when choosing tax instruments.