RADICAL changes to the tax system are needed to kick-start business activity and counter unemployment in the absence of strong UK economic growth, two think-tanks have argued.
Taxes on employment could be cut by £14bn to create jobs and raise economic growth because current low growth levels threaten the government’s deficit-cutting target, the Centre for Policy Studies (CPS) says in a report published today.
Its findings echo calls by the Organisation for Economic Cooperation and Development (OECD) yesterday for tax breaks on businesses to encourage them to employ new staff, and tax credits to raise incomes for struggling workers.
“It is essential that a strong pro-growth message is heard, both domestically and internationally,” CPS economist Ryan Bourne said.
Bourne warns that if the UK grows at half the rate forecast by the Office of Budget Responsibility until 2015, the deficit would still be nine per cent of GDP – only two percentage points lower than in 2010.
He proposes that the government should lift £14bn from the tax burden on business and workers, funded by reductions in budgets for international aid and pensions reform, to boost jobs and investment.
It calls for a drop in headline employer National Insurance contributions to 12 per cent from 13.8 per cent, and a four percentage point reduction in corporation tax to 21 per cent.
The government should also abandon the 50p top rate of income tax rate and raise the personal allowance to £10,500, it says – £500 more than the coalition’s current target.
The OECD suggests giving low-income workers, older people and families tax concessions to raise their household income. It wants to see governments targeting tax breaks at those that feel the burden of higher taxes most keenly, to encourage low-skilled and second earners back to work.
But it too backs pro-growth changes to employer taxes such as social security contributions and payroll taxes such as NI contributions as a way to increase labour demand.
Half of all tax revenue in OECD states – including the UK, Germany, France and the US – is generated by employment income, making it a critical lever for growth, the OECD said.
“These tax burdens discourage employers from hiring. They also reduce the incentives for the unemployed to look for a job, and for those in employment to work longer or harder,” it added.