Chancellor for the day: Howard Davies of the LSE

From extra bacon butties to an overhaul of income tax - Sir Howard on what he would do in No. 11.

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Last Updated: 31 Aug 2010

The first thing on my agenda would be a bacon sandwich. The one unambiguous improvement Gordon Brown made during his decade in the Treasury was to introduce the practice of providing bacon sandwiches for working breakfasts. They are particularly good, and I might have two, given the tough task ahead.

My second agenda item would be a wholesale reform of the Income Tax and National Insurance structure. The existing arrangements create curious kinks in the marginal tax curve and are not progressive - certainly at a time when we are going to need significant increases in the tax take, which will surely be the case after the recession is over.

So, I would merge Income Tax and National Insurance, starting at a lower rate for National Insurance, but with NI applying all the way up the income scale. Together with the projected change in the top marginal tax rate, up to 45%, adding a new NI charge would push the top marginal rate a little bit over 50%, to achieve the same tax take.

My guess is that other countries are going to need to do this to recoup the damaging losses to the public purse that the recession will bring, so the competitive disadvantage will be small. And the equity arguments are powerful.

I would make the tax concessions on charitable giving and giving to arts organisations more generous. We have a mixed-economy funding model for the arts and many charities, and that will be under serious pressure. If we don't want a wholesale massacre of cultural and charitable organisations, they will need help.

This reform will create a few winners and a lot of losers. The chancellor's email box will be groaning with complaints for months to come. But by that time, I will be safely back in my ivory tower, looking for another source of bacon sandwiches, as I will certainly never be invited back to Number 11.

Sir Howard Davies is the director of the London School of Economics. For this month's MT, we asked six UK leaders - Sir Howard, Luke Johnson, Vince Cable, Rupert Howell, Tim Martin and Cilla Snowball - what they would do if they had absolute power over the UK's financial system. You can also check out Sir Howard's regular MT diary column online - this month he discusses the ailing airline industry, Vikram Pandit's road to recovery and why Mervyn King is becoming the Victoria Beckham of the credit markets.


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Chancellor for the day: the LSE's Howard Davies

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