This week, Chancellor Rishi Sunak will present possibly the most consequential Budget in half a century. UK PLC is simultaneously struggling to cope with both the ongoing catastrophic impact of the Covid pandemic and the unanswered questions of what post-Brexit Britain will look like.
According to the OBR, this year’s expected budget deficit will likely be in the region of £394 billion. This is easily the biggest deficit in British peacetime history and a figure equal to the entire annual GDP of a third of the world’s nation-states.
There has been immense pressure, including from some who were more blasé about the far riskier fiscal position that Britain was in following the 2008/9 Financial Crisis, to balance the books quickly through large tax increases.
Work by the economist Julian Jessop has explained why we should view the debt created by Covid as a long-term commitment rather than a problem we need to tackle immediately.
We, at the IEA, argue that this is the time for the Chancellor to unapologetically go for growth and radically reform the UK’s distortionary and overly-complex tax system.
The arguments against tax rises are powerful.
The UK, when looking at a five-year average, is already suffering under the highest tax burden for 70 years, and for many taxes we may already be on the wrong side of the Laffer Curve (meaning we are bringing in less revenue that we might if rates were lower).
Even disregarding any tax rises we may see this Wednesday, the current government will likely preside over the highest tax burden since Clement Attlee’s administration. Taxes, whatever populists like to claim, never fall on just the rich or on businesses, but on workers, consumers, renters, and homeowners alike. Everyone, especially after a year of hardship, will suffer from higher taxes.
If we are serious about both paying off our £2.1 trillion debt mountain and creating the best possible recovery post-Covid, we need to maximise economic growth and allow the market to create jobs. This means there’s no better time to reduce our gigantic tax code – a document that is now 12 times larger than the King James Bible and has tripled in size since 1997.
In our report, we propose that the Chancellor should immediately scrap the licence fee, inheritance tax, stamp duty land tax, both the stamp duties that exist for buying shares, the apprenticeship levy, vehicle excise duty, capital gains tax, the bank surcharge, and duties on alcohol, tobacco, and gambling. All of these taxes distort economic activity and, in many cases, fall more heavily on the poor than the rich.
Many other taxes should be changed and simplified, particularly property taxes. Council tax, the community infrastructure levy, business rates, and s106 obligations, should all be abolished and replaced with a single land value tax.
A range of supposedly environmental policies, such as the aggregates levy and air passenger duty, have shown themselves unfit for purpose and should be wrapped into either an updated emissions trading scheme or a carbon tax.
Finally, instead of hiking corporation tax, we should abolish it. Corporation tax has been called “the most harmful for growth” by the OECD. Instead, it should be replaced with single tax on capital income, similar to the PAYE tax on income. This would mean neutrality between capital and labour taxes and boost productivity as returns on successful investments will no longer be penalised.
Prime Minister Boris Johnson has always portrayed himself as a Churchillian figure. Perhaps he should consider that Churchill, coming to power in 1951 after periods of upheaval and economic shock, oversaw the largest reduction of taxation as a proportion of GDP during his time in Government of any leader since.
Churchill famously said “for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.” It’s time for us to get out of the bucket and go for growth.