Labour’s tax rises are damaging the economy

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Today the Tax Foundation updates its annual International Tax Competitiveness Index. It’s not great reading for the UK, which comes 30^th out of 38 countries. This is one place better than last year but two places worse than 2014, the first year of the Index.

The Index aims to measure how well a tax system raises revenue while minimising economic harm and distortions. It is not about how high the overall rate of tax is – for example, Sweden, which raises a larger share of national income in tax than the UK, comes 13th because it raises more tax in a less damaging way than the UK.

The Index has five categories of taxation. The UK comes first on cross-border taxation, partly because of its extensive network of tax treaties around the world. On individual taxation, it has fallen from 19th to 22nd in two years. On corporation tax, the UK is 25th. Its highest rank was 11th, but has fallen after the last government raised Corporation Tax to 25% from 19%.

The UK’s consumption tax regime (VAT) is 34^th, thanks largely to a fragmented base and high registration threshold. Finally, property taxes are 33^rd, due to both high rates and bad taxes such as stamp duty. Overall, the UK raises the most property tax, as a percentage of the nation’s capital stock, of any OECD country.

All of this is largely fixable, even for a Labour government that doesn’t want to sacrifice revenue. Last year, the CPS and other think tanks from across the political spectrum jointly recommended seven revenue neutral packages for reform, which could drive economic growth while raising the same amount of revenue. Sadly, chancellor after chancellor has been unwilling to take the steps needed to fix our tax system. Pick up any report on tax from the last 20 years and it highlights the same problems that exist today.

Unfortunately, the tax system could be made even worse. If the government were to align capital gains tax (CGT) with income taxes, then the UK would fall from 30^th to 32^nd in the Index. CGT is set at between 18% and 24%, depending on the asset and taxpayer. But raising it could actually lose the government money – HMRC estimates that hiking the higher rate of CGT by 10 percentage points would lower revenue by £3.6 billion after three years. Thankfully, in recent days the Chancellor appears to have seen sense and ruled out aligning CGT with income tax (although he might raise it a little).

The second damaging reform would be the introduction of a wealth tax. Admittedly, this is unlikely in this Budget, but it has been called for by several senior Labour politicians such as Louise Haigh, who said that ‘We need real reform: a proper wealth tax that rewards work, closes loopholes and finally gives us the means to invest in the NHS, schools and our communities.’ Introducing a wealth tax would see the UK fall from 30th to 35th overall and to 38th in the Property rankings. It would join just four other countries that levy a full wealth tax.

The reason it is so rare is because it largely fails to achieve its aims while also causing economic damage. In Switzerland they raised just 1.16% of GDP in revenue in 2023, the highest of any country that levies a wealth tax (Switzerland also has no tax on capital gains and inheritance). Spain raised just 0.21% of GDP. They are a poor tool for redistribution or raising revenue for the kind of state that Andy Burnham wants. They also overtax assets with low returns and can encourage capital flight.

There are big disagreements over how much tax the government should raise. However, there can be much more agreement that our tax system is harmful to economic growth, regardless of the total amount of revenue it raises. The Chancellor should focus on simplification: fewer taxes with broad bases and no exemptions. This would drive growth and raise the revenue the government needs.

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