This report from UK think tank the Centre for Policy Studies looks at the UK’s current tax system and economic growth.
If the UK is to recover from the pandemic as quickly as possible, it needs economic growth. However, according to this report, the current tax system is not equipped to deliver it. The latest edition of the Tax Foundation’s International Tax Competitiveness Index, published last week, found that Britain is in the bottom half of the OECD, behind 16 other European countries. To speed up recovery after the coronavirus, and maximise the opportunities of Brexit, the system needs reform. The Centre for Policy Studies has been working with the Tax Foundation to explore the tax changes that would maximise Britain’s long-term growth potential, while raising the same amount of money for the Treasury. The package of measures proposed would see the UK rise from 22nd to 9th on the International Tax Competitiveness Index. However, one alarming implication of the report is that the pro-growth approach to tax reform is at odds with current political dynamics, which seem to point towards higher taxes on business and investment, and further erosion of the consumption tax base. ‘A Framework for the Future: Reforming the UK Tax System’ argues that the measures which would maximise growth include: A complete overhaul of property taxation. Stamp Duty Land Tax would be abolished, generating a significant boost in property transactions that would offset some of the revenue cost. Stamp taxes on shares would also be axed. Radical reform of business rates to boost investment. The value of buildings, structures, plant, and machinery would be stripped out of the tax base, so that rates only applied to the value of the underlying site. A move towards ‘full expensing’ of businesses’ capital expenditure, so that companies can fully and immediately deduct investment costs against taxes. In the short term, the report recommends making the £1 million Annual Investment Allowance permanent and indexing other capital deductions so that they hold their value over time. A more competitive income tax system. The 45p additional rate of income tax would be abolished, and the top rate on dividends cut to 26%. Basic rate taxpayers would no longer pay tax on dividends since profits are already taxed at the corporate level. To avoid a toxic tax and trade war, the report also recommends scrapping the Digital Services Tax and focusing on internationally agreed-upon solutions. The report also argues that, if spending cuts are not possible and revenue neutrality is needed, the least distorting way to fund such pro-growth tax reform is by broadening the VAT base. The UK currently has one of the narrowest VAT bases in the developed world. If it were as broad as New Zealand’s, it would generate enough extra revenue to single-handedly fund the NHS. Even if we merely sought to reach the OECD average, it would raise £35 billion a year – enough to fund the reforms above while giving every UK adult £400 a year, which would limit the impact on poor households. These reforms would significantly benefit the ‘levelling up’ agenda, boosting manufacturing, easing the tax burden on struggling areas, and incentivising greater private investment. Abolishing transaction taxes, meanwhile, would make Britain’s housing market less dysfunctional, and give many more people a chance to own a home that really suits their needs.Read Full Report