Britain needs better taxes, rather than just higher ones, to boost fairness and economic growth

Britain needs to move away from its simplistic and pernicious cycle of promising tax cuts while delivering tax rises, and towards reforming and improving our tax system so that it supports, rather than hinders, economic growth, according to major new research published today (Wednesday).

Tax planning – the 39^th report of The Economy 2030 Inquiry, funded by the Nuffield Foundation – notes that the UK’s tax take is rising from 33 per cent of GDP in 2009-10 to 38 per cent by 2027-28 – equivalent to a tax rise of £4,200 per household.

The authors say that with the UK’s tax take set to hit £1 trillion by 2025-26, the UK needs to move away from flip-flopping (such as cutting and then raising corporation tax) and wishing away problems (such as the £9bn loss of fuel duty revenue by 2030), and towards a proper tax strategy focused on taking on the UK’s twin economic challenges of raising growth and reducing inequality.

To do this, tax policy should focus on boosting productivity by reducing barriers to business investment and encouraging dynamism, and protect the earnings of low and middle-income families by shifting the tax burden to externalities such as pollution, other income sources and wealth.

The report says that the Government is at least trying to support business investment with its welcome, if temporary, full expensing tax allowance. This should be made permanent, but wider changes are also needed, including making new structures and improvements exempt from business rates.

A second pro-growth tax priority should be to encourage dynamism by making it cheaper and easier for firms to grow and move premises, and for people to move jobs and homes. To do this, policy makers should reduce the transaction costs associated with these activities by cancelling the 2025 stamp duty rise, and halving stamp duty for main homes and non-residential properties, at a total cost of £5 billion.

These reforms can be paid for in part by reducing the UK’s high VAT registration threshold from £85,000 to £30,000 – a policy that is currently both expensive and acts as a disincentive for small firms to grow.

As well as raising growth, the tax system should aim to create a level playing field for taxpayers, preventing well-advised rich people using its complexity to reduce their bills. Failing to do this has put more pressure on wages, say the authors, with extra revenues too often sought by raising National Insurance Contributions (NICs).

This unfairness is most obvious when comparing the marginal tax rates paid on employees’ earnings. These peak at 53.4 per cent when employer NICs are included or 54.5 per cent paid on income from dividends, falling to 47 per cent paid on self-employment income, 45 per cent on rental income, 28 per cent on gains from property, and as little as 0 per cent if you keep your income in a company and then emigrate.

The report proposes aligning the tax treatment of these different income sources by increasing tax rates on self-employment and rental income, enabling the rate of employer NICs to be cut by one per cent.  Moving towards equal treatment would also mean increases in the rates of Capital Gains Tax, such as from 28 per cent to a top rate of 53 per cent for second homes, and a top rate of 37 per cent for shares. Crucially though, the report argues that this would be combined with a major tax cut, with no tax paid on gains that are merely in line with inflation. The result would be a net Capital Gains Tax cut for many, with anyone seeing an annual capital gain for shares of 8 per cent or less facing a lower net tax rate than the 28 per cent rate that George Osborne oversaw between 2010 and 2016.

These revenue raising reforms can be used to end the very high marginal rates that some face by scrapping the withdrawal of Child Benefit between £50,000 and £60,000 – which can leave some parents with marginal rates of over 80 per cent – and the tapering away of the Personal Tax Allowance beyond £100,000.

The complete package would restrict tax arbitrage and ensure that as few people as possible face a marginal tax rate on their income of over 53 per cent.

Finally, the report says that the tax system has failed to respond to Britain’s four-decade wealth boom and needs major reform. One obvious example is inheritance tax, which has very high rates for the few people that actually pay it, and is too easily avoided by the super-wealthy and well-advised.

To address this, the complicated residence nil-rate band should be abolished, and banded rates of 20, 30 and 40 per cent introduced to make the tax more progressive. This should be accompanied by ending two other key reliefs – Agricultural Relief and Business Relief, the latter of which costs £800 million a year despite being used by just 3,000 estates.

This overall tax reform strategy would be revenue neutral – showing that higher taxes can also be better taxes that support economic growth and fairness, and that there is more to tax policy than promising cuts while loading extra taxes onto workers’ wages.

Adam Corlett, Principal Economist at the Resolution Foundation, said:

“The UK’s taxes have jumped up overall and are more likely to rise further than fall in future, despite the political rhetoric around cuts.

“But this rising quantity of tax revenue has not been matched by a rising quality of tax policy. There is no strategy behind a complicated system that sees some business owners pay no tax on their profits, while some families face marginal tax rates of over 80 per cent.

“Britain’s tax system needs a complete overhaul so that it is focused on helping rather than hindering economic growth, reducing inequality and creating a level playing field. These are basic principles that most taxpayers would expect, but that our current system frequently fails to deliver.”