What tax changes could be on the Budget cards?

It is in this context that the tax revenue-raising measures would be evaluated by the policymakers and their political masters in coming years.

On the one hand, it may be more politically expedient to raise capital taxes and on the other, their share in the total tax revenue is too small for their increase to make a significant difference to the total tax take.

Another possibility is the introduction of an annual wealth tax to the UK tax system, which has hitherto been ruled out.

Tax foundations 

Let us now consider the foundations of good tax policy. These were formulated by Adam Smith in his work the "Wealth of Nations" 250 years ago and have stood the test of time ever since. Smith cites four cardinal principles as follows:

1. Equity of contributions: People's contribution to public coffers must be proportional to their ability to pay. The largest burden must be put on broadest shoulders.
2. Efficiency: The cost of tax payment ought to be minimal in proportion to what it brings to the coffers, not only in the administrative sense but also in not deterring people from business activity, not encouraging them to evade tax, not to leave the country altogether and not imposing a heavy burden on taxpayers to comply with the tax obligations.
3. Certainty of liabilities: The basis of tax payable and time of payment must not be arbitrary. They ought to be certain and clear. This is normally done through conducting parliamentary debate, proposing, and voting on amendments of the government’s tax revenue-raising measures.
4. The time and manner of payment ought to be convenient for the taxpayers. 

These principles are still sound. However, they do not in themselves provide clear guidance about how to manage any potential conflict arising between them and/or where to focus upon in raising additional revenue. 

In particular, the principles of efficiency and equity may conflict with each other, for example imposing much higher rates of tax on those who can afford to pay more (equity) may well discourage further economic activity by them (efficiency).

This specifically matters for the present government, which has identified economic growth as its prime goal to move the country forward. More recent works have focused on the tax structures that maximise social welfare, while balancing efficiency and equity goals, through an explicit exploration of their trade-offs in each policy recommendation.

By way of an example, it has been argued that rates of CGT should be closer to or even equal to income tax on the ground that work and investment rewards should be taxed at the same rate. Indeed, this was the case between 1988 and 2007 under both Conservative and Labour governments.

However, exceptional care must be taken to ensure that changes in investor behaviour, through delaying the realisation of gains or even investing in the first place, would not negate the impact of re-aligning tax rates on capital gains and income.

Taxing inflationary gains has been considered inequitable, therefore, gains ought to be adjusted for inflation, either through an indexation allowance or by taper relief, before being taxed. Both methods have been previously used in the UK’s corporate and personal tax contexts and subsequently replaced by the current policies.

The Resolution Foundation has estimated an additional CGT of £7.5bn a year will be raised through charging gains at the same rate as income on inflation-indexed gains in its substantial tax-raising proposals.