IEA releases report on taxation and economic growth
Furthermore, they have undertaken a major and original statistical analysis of the economic costs of high taxes and, equally importantly, which taxes cause the most economic harm. The report then maps out a plan for a fair, liberal and welfare-maximising tax system.
The report finds that:
- There has been a strong upward trend in taxation and government spending as a proportion of national income in developed countries over the last 100 years.
- Government spending in the UK is considerably higher than in Switzerland, Australia and Ireland. It is also somewhat higher than in Canada, the US and New Zealand – showing that a welfare state of significant size can be provided at levels of government spending far below those in the UK.
- Although there is a general perception that there has been a significant reduction in government spending since 2010, there has not been. Real spending fell by just 0.5 per cent a year between 2010 and 2015.
- The taxes that have to be raised to finance government spending damage growth through a number of channels. These include reduced incentives for work, saving and entrepreneurship.
- Over the last three decades a considerable amount of evidence has been amassed that suggests that tax has a significant negative impact on growth. This evidence suggests that a 10 percentage point increase in the tax or government spending burden is associated with approximately a 1 per cent fall in the growth rate in the long term.
- New modelling for this paper shows that a 10 percentage point fall in a combined index of top marginal tax rates and regulation relative to its trend produces a rise in output over about thirty years of 24 per cent. The increase in the growth rate over the thirty years following the cut would be equivalent to 0.8 percentage points per annum.
- The UK has a very badly designed tax system with high marginal rates, huge complexity, taxes that discourage wealth-creating economic activity and wide-ranging exemptions.
- Overall, the UK government should abolish twenty current taxes. Among other taxes, corporation tax, national insurance, capital gains tax, inheritance tax, council tax, business rates, the television licence fee, the apprenticeship levy, stamp duties, alcohol duties, tobacco duties, vehicle excise duty and air passenger duty should be scrapped.
- A radically reformed tax system should be designed to raise around 20–25 per cent of national income. It would comprise the following main elements:
- A flat-rate income tax set at 15 per cent of income above a personal allowance of around £10,000
- Distributed corporate profits would also be taxed at this rate. VAT set at 12.5 per cent, with most exemptions abolished.
- A new housing consumption tax on rents and imputed rents to mimic VAT at 12.5 per cent
- A new location land-value tax.
- Fuel duty retained at around half the current rate.
- If this package were implemented, static modelling would suggest that the poorest decile would enjoy tax cuts worth 26 per cent of gross income, followed by 19 per cent, 17 per cent and then 13 per cent for the fourth poorest decile before further falling to 7 per cent for the fourth richest decile. The benefit of the proposed tax changes then rises slightly with income.
- Because lower taxes would lead to higher growth and because there would be a tax system that led to far fewer distortions of economic decisions, it is likely that employment, productivity and wage levels would rise considerably. These effects are likely to disproportionately benefit the poor as they are more likely to be at the margins of the labour market in insecure, low-paid employment or unemployed.
Commenting on the landmark report, Mark Littlewood, Director General of the Institute of Economic Affairs, said:
“The economic evidence is clear: spending is far too high and the tax system is far too complicated. This new report provides a rigorous approach to discovering and documenting the size of the state and how government spending and regulation affect the wider economy. But, most importantly, the authors have undertaken an original statistical analysis of the economic costs of high taxes and, which of those are the most pernicious.
“It provides a manifesto for how to create a lasting legacy of an economy with lower and simpler taxes that will boost prosperity for all.”
Notes to Editors:
For media enquiries, please contact Stephanie Lis, Director of Communications Director on 020 7799 8909 or 07766 221 268.
This publication will be launched tonight at an event in Westminster, with speeches from John Redwood MP, journalist Iain Martin and IEA Director-General Mark Littlewood. If you are interested in attending please contact Stephanie Lis, as above.
To read the full report, Taxation, Government Spending and Economic Growth, click here.
The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems.
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