IfG set out proposals for better evidence-based tax policy making

In the report, ‘How is evidence used in tax policy making?’, Thomas Pope, Gemma Tetlow and Arun Advani say that while there is a wealth of evidence in the area of tax policy, due to the closed nature of the budget process, sometimes policy makers do not use that evidence to best effect.

Additionally, there is an ‘outsized’ focus on the effects of policies over the OBR’s five-year forecast horizon. In other words, “more energy goes into developing evidence on the impacts over the next five years” and politicians pay less attention to the impact of policy on the supply side of the economy that is likely to manifest into the future. As a result, some types of responses to tax policy, such as forestalling of dividends or other flexible payments to avoid a tax increase, are “focused on more heavily than those that take longer, such as changes to saving behaviour”.

Highlighting that taxes most likely will be the main battleground in the upcoming General Election, the report argues that, more than ever, it is vital that “taxes are well designed - bringing in as much revenue as possible, as reliably as possible, for the lowest economic cost”.

To improve the use of evidence in tax policy making, the IfG makes recommendations including:

• Re-commit to a single annual fiscal event (a change that was originally advocated by IfG, CIOT and the Institute for Fiscal Studies in their 2017 Better Budget report) and the annual rhythm of consultation
• Explore options for expanding the data collected by HMRC through tax returns
• Improve transparency around tax policy decisions
• The OBR should publish more information and analysis around tax policy decisions
• Embed a more robust approach to evaluation in the Treasury and HMRC
• Deliver on HMRC’s ambition to publish internal evaluations
• Improve engagement with external researchers, including to improve the quality of internal quantitative work
• Encourage and enable more useful external quantitative work
• External experts should present evidence in a way that makes it easier for civil servants to use

The report summarises that while the Treasury and HMRC have well-developed procedures for drawing on evidence, there are some gaps. In recent years, both these departments have taken some steps to publish more tax policy analysis and evaluations, but more improvements are required.

“Officials do not always engage as effectively as they could with external researchers, who for their part could also do more to make their work accessible to officials”, states the report. By considering the mentioned recommendations, the government can fill these gaps and improve how evidence is used in tax policy making.

In the report, IfG conclude that “regardless of who wins the next election, any change to make the UK’s tax system more effective and more consistently based on good evidence will be of benefit to both the government and the people it serves”.