Whilst scouring through some academic literature this morning, I came across an interesting paper in The Economic Journal on "Tax Policy For Economic Recovery And Growth".
Reviewing historical OECD data, it comes to some important conclusions about the best tax reform policies (with any changes revenue neutral) to enhance short and long-term GDP growth. It finds:
- Growth can be increased by moving the tax base away from income and corporate taxes and towards less distortionary consumption and immovable property taxes
- Reductions in the top personal income tax rate encourage entreneurship and investment, but the benefits will only be felt in the longer term
- Reductions in income taxes for those on low incomes are the most effective way to induce short-term demand, increase work incentives and reduce income inequality
Its conclusions give a mixed message on the coalition's approach to tax reform thus far. It suggests that the coalition is right to immediately prioritise the erosion of income tax liabilities for the poorest workers whilst increasing the broad base VAT consumption tax, and that making corporation tax rates more competitive in the long-term will have significant investment incentives.
But at the same time, it suggests that the punitive 50p tax rate will have negative long-term growth effects through restricting productivity brought about by entrepreneurial activity. If the government feels that it must be seen to be being 'progressive' in its tax policy, then there would be less of a damaging effect on growth if it focused more on immovable property taxes (a tax on wealth) rather than income tax (a tax on earnings).
In the past, taxes on property have been controversial - and it does not appear that the coalition will significantly adjust the balance towards them. But is it really worth undermining long-term growth by ignoring this sort of evidence?