Our bureaucratic tax system is destroying jobs and growth

Allister Heath
If you are a glass half full type of person, the news that the UK’s tax system is now the 16th “best” in the world, rather the 18th, might be something to rejoice about. I prefer to despair about the complex and arbitrary nature of our tax code, about the fact that we were 11th as recently as in 2006, and that a medium sized UK business has to make eight tax payments a year and spend 110 hours on tax compliance, according to excellent research from professional services giant PricewaterhouseCoopers.

Its Paying Taxes 2013 league table takes account of the total tax cost, the number of payments that need to be made and the time required to comply, as proxies for compliance costs. The total tax component of this measures all taxes and contributions that medium-sized firms are forced to pay. These include corporation tax, social contributions and labour taxes collected by the employer, property taxes, property transfer taxes, dividend tax, capital gains tax, financial transactions tax, waste collection taxes, vehicle and road taxes, and other small taxes or fees.

The United Arab Emirates (of which Dubai is a flagship component) topped the league table, followed by Qatar, Saudi Arabia, Hong Kong, Singapore, Ireland, Bahrain and Canada. There is no real reason why the UK couldn’t have a tax system that is as good for medium sized firms as either Ireland or Canada, so our ranking is shamefully poor. This is costing jobs and growth. But while the UK is hardly the easiest country in the world in which to comply with the tax system – compliance takes just 12 hours a year in the United Arab Emirates – at least it is very far from being the worst either: it takes an astonishing 2,600 hours in Brazil.

Andrew Sentance, PwC’s excellent economic adviser, used regression analysis to look at the relationship between the level and complexity of taxes between 2004 and 2011 and average economic growth rate and the growth of the stock of inward investment.

His findings were striking. Each ten percentage point cut in the total tax rate (relative to business profits) is associated with an increase in the annual economic growth rate of almost 0.1 per cent a year. Each 10 per cent cut in the total tax rate is associated with an increase in the stock of inward investment by 0.7 per cent per year. Another key drag on growth is the administrative burden of the tax system, reflected in the number of tax payments businesses need to make. Complex tax systems also reduce economic growth. Even if the chancellor can’t or won’t cut taxes, he needs to drastically simplify the tax system. The research is clear: high taxes and a high cost of collecting taxes are both bad for growth. The UK desperately needs tax reform.

It is not just the tax system that needs fixing: the UK is still spending far more than it can afford. The budget deficit is going up, not down: borrowing in the fiscal year to date is £5bn above last year’s total, reaching £73.3bn. Central government current expenditure (which excludes capex) was £364.5bn, up 2.3 per cent (and down only very slightly in real terms). But central government tax receipts were up by less: only 0.4 per cent higher so far. Receipts from income and capital gains tax are up exactly zero per cent. Corporation tax receipts are down 9 per cent. Taxes on interest and dividends are down. The only “good” news is that national insurance contributions are up 4.6 per cent – other than that, disastrous figures for a government supposedly committed to fiscal conservatism.

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