1 March 2021

20 taxes the Government should scrap to boost the economy

By Sam Collins

This week, the Chancellor will deliver arguably the most consequential Budget for many years. Despite the fact we have the highest average tax burden since Clement Attlee was Prime Minister, tax rises are seemingly on the Government’s agenda. Covid-19 has resulted in the biggest economic slowdown in 300 years.

At the same time, thanks to the Government achieving something close to a final Brexit resolution, our economy is also faced with a range of new risks and opportunities as we strike back out into the wider world. 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 us the largest deficit in British 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, ten times the size of the entire economy of an independent Scotland.

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 current accounts deficits we saw in 2010. If we can keep the underlying economy strong we can grow our 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 £400bn, there is surely an extra £5bn to do whatever project they are calling for. If the Government can resist those demands, then we can roll over the debt we hold and pay it off as our 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 vanishingly little to do with encouraging it. Nowhere is this clearer than in the tax code.

The British tax code has become a behemoth of complexity and economic distortion. Since 1997 it has trebled in length, and now runs 12 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 environment 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.

Other 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 we 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 we must rebuild our economy and prepare to face the wider world: we need a radical new approach to taxation.

Click here to subscribe to our daily briefing – the best pieces from CapX and across the web.

CapX depends on the generosity of its readers. If you value what we do, please consider making a donation.

Sam Collins is Policy Advisor to the Director General of the Institute of Economic Affairs and co-author of '20 Taxes to Scrap: How to grow the UK economy by simplifying the tax system'.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.