Wednesday 14 October 2020 7:01 am

Think tanks warn Sunak not to hurt UK’s ‘tax competitiveness’

Free-market think tanks have warned the government not to raise taxes on companies and dividends to try to mend the hole in the public finances, arguing that it would be an act of “self-sabotage”.

The UK budget deficit is set to hit £350bn this year, the Institute for Fiscal Studies (IFS) think tank said yesterday. That would be by far the biggest gap since the World War II.

Read more: UK taxes could rise by more than £40bn, says IFS

It warned taxes would have to rise by more than £40bn a year by 2025 to stop public debt rising out of control.

Reports over the summer suggested Sunak was weighing money-raising measures. These could include increasing corporation tax or equalising the tax rates on capital gains, dividends and income.

However, Sunak moved to reassure his own MPs last month that there would be no tax rise “horror show”.

Nonetheless, the Centre for Policy Studies (CPS) think tank today went on the offensive.

Tom Clougherty, the CPS’s head of tax, said raising taxes “in the midst of enormous economic uncertainty, and with a post-Brexit trade deal hanging in the balance, would be an act of self-sabotage”.

The free-market think tank, along with the like-minded Tax Foundation from the US, said raising taxes would hurt the UK’s “tax competitiveness”.

The Tax Foundation today released its annual international tax competitiveness index. It ranks countries on how low and simple their taxes are overall, arguing that lower taxes are “pro-growth”.

It found that the UK came 22nd out of 36 countries from the OECD group of wealthy economies.

Economists argue over the relationship between lower taxes and growth, however. The US ranked 21st on the index, for example, but was one of the fastest growing rich countries last year.

The UK has one of the lowest corporate tax rates out of the world’s advanced economies.

But it was held back on the index by its “ungenerous approach to business investment allowances”, the CPS and Tax Foundation said, such as a high top rate on dividend income.

Economists say raising taxes too soon a mistake

The CPS said it would be a mistake for the UK to raise the rates paid on dividends and capital gains so that they match income taxes.

Clougherty said: “When the time does come to bring down the deficit, the last way the government should do it is by raising taxes on productive investment.”

He added: “The government should resist calls to raise taxes in the short term. It should focus on growth.”

Most of the economics profession – from the right to the left – agree that raising taxes too early would dent the recovery. Although many argue they will have to rise within a couple of years of the recovery taking hold.

Carl Emmerson, deputy director of the IFS, said yesterday that he would not advise the government to try to balance the books “any time soon”.

A Treasury spokesperson said: “The UK has a highly competitive business tax regime and remains one of the best places in the world to do business. 

Read more: Bounce Back Loan scheme could cost the taxpayer up to £26bn

“We have a lower headline rate of corporation tax than any other major comparable economy.”

They added: “We’re committed to a fair and sustainable tax system that helps people and families with the cost of living, funds the first class public services they expect, and creates an environment for business to succeed.”