Today the Tax Foundation publishes its International Tax Competitiveness Index – and it’s not good news for the UK, which comes 32nd out of 38 OECD countries. The Index, produced in the US, measures how pro-growth a tax system is. Importantly, it does not measure the overall level of taxation, but the way taxes are raised. So while the UK languishes near the bottom of the Index, high-tax Sweden is 11th, thanks in part to its simple (but high) income taxes. At the very top, Estonia, Latvia and New Zealand lead the way with light-touch, pro-growth tax systems.
The Index uses over 40 measures, organised into five categories, to assess a tax system. Depressingly, the UK’s only area of strong performance is cross border taxation, where it ranks second thanks in part to having the highest number of international tax treaties of any country. In the other four categories, our performance ranges from poor to abysmal. On corporate taxation we rank 28th, declining due to the rise in the corporation tax rate from 19% to 25%. On income taxation we come in 25th, thanks to the rise in capital gains tax and employer’s National Insurance.
On consumption taxes, which in the UK is mostly VAT, we’re ranked a depressing 33rd. That’s for two reasons: the UK has a very high registration threshold for business (£90,000 vs £40,000 on average), and our VAT base covers less than half of all consumption.
A special mention, however, goes to our property tax regime, which is the second worst of any developed nation. The UK collects more in property tax than any other country, but does so via damaging taxes like stamp duty on land and shares. And the wealth tax many Labour MPs are clamouring for would leave us with the worst regime in the developed world.
In truth, none of this is earth-shattering. Most people know the UK tax system is a mess. And we know what to do to fix it: remove high marginal rates, eliminate growth-destroying taxes like stamp duty and simplify the system by removing exemptions for certain products and interest groups. There are 31 countries with better tax systems than ours, so we can pretty much just copy what the better performers do.
If we really want to juice our competitiveness, we at the Centre for Policy Studies suggest three particular pro-growth reforms – though all of them do come with a hefty price tag.
The first would be to abolish stamp duty on land and shares. As Kemi Badenoch pointed out the other week, stamp duty suppresses housing transactions and stops people moving into homes more suited to their needs. Stamp duty on shares, meanwhile, depresses the cost of UK shares, raises the cost of capital and suppresses investment, while also harming workers because their firms end up investing less and their pensions end up with lower values.
The second reform would be to lower corporation tax back to 19%. Corporation tax is the fourth largest revenue raiser (after income tax, National Insurance and VAT). However, out of these four taxes, it is the most damaging to growth. In fact, because the effect of the cut would boost growth, over 50% of the lost revenue should be recovered over the longer term, according to the Treasury’s estimates. This would also see the UK go from having the 20th lowest rate to the fourth lowest.
Finally, and most nerdily, the UK should expand the provisions for cost recovery on investment. ‘Full expensing’ means that a business gets a 100% deduction for its capital expenditure in the tax year the money is spent. The UK now allows full expensing for machinery, but extending this to all forms of capital expenditure means that businesses would be incentivised to invest in ways that further raise their productivity.
The Chancellor has an opportunity to make the tax system more growth-friendly this Budget – but judging by the headlines, she is also mulling many, many ways she can make things worse. Let’s not see Britain fall even further behind our rivals.
Read the Centre for Policy Studies’ briefing note on the UK’s tax competitiveness.
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