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Tax Policy for Growth

    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?

    Ryan joined the Centre for Policy Studies in January 2011, having previously worked for a year at the economic consultancy firm Frontier Economics.

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    Anonymous - About 2869 days ago

    There is the possibility of simplifying the tax system and making it fairer at the same time.

    1] Income Tax
    NI is a tax in all but name. 13%
    There are three rates 20% 40% & 50%
    Pensioners currently do not pay NI.
    If the top two tiers were combined at 45% [average]
    If the bottom two tiers [+ NI] were combined at 24% [average]
    We would end up with two tax rates 24% & 45%
    For pensioners it would increase their level of tax fro 20% to 24%, but this could be phased in over 3 years.
    Tax relief on Pension contributions to be set at the lower rate [24%]
    Tax allowance to be set as required.

    2] Property Tax v Council Tax
    Currently Councils only collect 20% of what they spend from Council Tax.
    Using 8/9 bands this cost a lot to collect.
    If all Property was to have a property tax of 1% levied. [using Land Registry Valuations [Sales] and Council Tax abolished.

    It would solve the Property valuation problem, long overdue.
    The can't pay, won't pay problem would be resolved by by a charge made against the property by how many years in arrears at sale values, not historic value, to offset the loss to HMRC of tax not paid.
    Low income pensioners etc could be exempt of paying annual payments. [charge made as above, when property is sold] in lieu of death duties. Plus no need for Council Tax benefits to be paid.

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