20 taxes the government could scrap to boost the economy
At the same time, thanks to the government achieving something close to a final Brexit resolution, the economy is also faced with a range of new risks and opportunities. This seems like an imprudent time to be adding burdens to businesses or individuals.
Still, one can understand the sense of panic emanating from 11 Downing Street. As well as death and despair, 2020 has given the UK the largest deficit in peacetime history. The Office for Budget Responsibility is expecting the combined cost of lost tax revenues and the huge increase in government borrowing to be £394 billion. The British state owes £2.1 trillion.
However, as Julian Jessop has argued, we ought not to get carried away with pessimism. A single massive spending splurge like this is very different from the long-term deficits we saw in 2010. If the underlying economy is strong, the UK can grow its way out of this debt as expenditure returns to normal and tax returns pick up.
This requires a level of discipline from the government that may prove beyond it. Ministers will need to refuse the myriad special interest groups who will argue that, with a deficit of almost £400 billion, there is surely an extra £5 billion to do whatever project they are calling for. If the government can resist those demands, then the government can roll over the debt it holds and pay it off as the economy grows.
But this plan requires a rather obvious step – economic growth. In the television show South Park there is an oft-quoted encounter that the protagonists have with the “Underpants Gnomes”. The gnomes steal underpants from the town, working to a business strategy that is summed up as: Phase One, gather underpants; Phase 2, ???; Phase 3, Profit. Despite repeated prodding, none of the gnomes can explain Phase 2, or, rather, explain how their activity will bring about their desired result.
Too often it is the same with economic growth. Governments of all stripes claim to want to maximise economic growth, yet consistently introduce policies which, if not directly contradictory to this goal, seem to have little to do with encouraging it. Nowhere is this clearer than in the tax code.
The UK tax code has become a behemoth of complexity and economic distortion. Since 1997 it has trebled in length, and now runs twelve times longer than the King James Bible. Governments consistently want growth, yet also regularly fiddle with the tax system, increasing its complexity. This must change.
If the point is to maximise economic growth then the Chancellor should be using this Budget to paint a picture of a reformed, less complex, less distortionary tax code. In our new paper, 20 Taxes to Scrap: How to grow the UK economy by simplifying the tax system, my co-author Alexander Hammond and I lay out 20 taxes that the Chancellor could abolish or reform.
Many of these taxes, such as property and environmental taxes, are simply unfit for purpose. Many have been created to solve a perceived problem, rather than fulfil a well-thought-out taxation strategy. Air Passenger Duty, the Aggregates Levy and renewables obligations should be wrapped together into either an improved emissions trading scheme or carbon tax. Business rates, Council Tax, the Community Infrastructure Levy and similar property taxes ought to be abolished and replaced with a single tax on land value.
Moreover, taxes such as Council Tax, the duties on alcohol, tobacco, and gambling, Vehicle Excise Duty and the BBC licence fee, are regressive and impact the poorest far more than the rich.
A range of other taxes on economic activity – including Inheritance Tax, Stamp Duty Land Tax, both the stamp duties on buying shares, Capital Gains Tax, the Apprenticeship Levy and the bank surcharge – grossly distort economic activity and should be abolished or reformed. Corporation Tax, widely reported as a tax likely to rise in the Budget, has been described by the OECD as the tax “most harmful to growth”. At a time of economic turmoil, the government should be abolishing this tax, not raising it.
I began by calling this Budget the most consequential in decades – and I’m not alone in the sentiment. But this will only be the case if the Chancellor chooses to make it so. This is the year that the UK must rebuild its economy and prepare to face the wider world: we need a radical new approach to taxation.
This article was originally published on CapX.