Milton Friedman once argued that he was “in favour of cutting taxes under any circumstances and for any excuse, for any reason, whenever it's possible.” The reason, Friedman argued, was because the only effective way to hold down the size of the state is to hold down the amount of income it is able to extract from the population. The way to do that is to cut taxes. Of course, the assumption that Friedman makes is that by cutting tax rates, tax revenues will fall. However, if tax rates are too high, economic activity is destroyed and tax revenues will disappoint. In the UK there are still some taxes which if cut or even abolished entirely would probably eventually lead to an increase in revenue. Whilst there are many candidates, here are seven taxes that the Government should aim to abolish.
1. Air Passenger Duty
APD is charged on domestic and international flights departing from a UK airport and as Natali Pagliari explained, it is one of the highest flight departure taxes in the World. Few people pretend that APD is anything other than a revenue raiser for the Treasury – it has little or nothing to do with the environment. However, even in that function, APD seems to be failing. PwC research released in May this year updates some work they carried out a few years ago on the economic impact of APD. Its modelling suggests that abolishing APD would increase trade, tourism and FDI and thus boost GDP, create 61,000 jobs by 2020 and actually increase tax receipts by a cumulative £2 billion by 2020. The Government has already taken some positive steps by abolishing some of the bands and cutting it for children. It should just go ahead and abolish it entirely.
2. Supplementary Charge + 3. Petroleum Revenue Tax
The Supplementary Charge is an extra tax on the profits of oil and gas companies working on the UK Continental Shelf and the Petroleum Revenue Tax is a tax on the profits of older fields. As we explained in a recent Economic Bulletin, the North Sea oil and gas sector is suffering from serious challenges to its survival. Domestic production is continuing to fall; in 1998, total UK oil and gas production was 230 million tonnes of oil equivalent but this fell to 76 million in 2014. Prices have fallen and fields are maturing which is raising costs. However, the tax burden faced by the sector is still absurdly high for an industry which has seen such an astonishing decline. Total offshore corporation tax revenue has fallen from £9.8 billion in 2008/09 to £2.1 billion in 2014/15. The OBR expects this to fall again to £600 million this year before trickling away in the years after. The oil and gas sector is still a highly productive, skilled and well paid industry but many fields face marginal tax rates of as high as 75% (falling to 67.5% in January). Abolishing the Supplementary Charge and the Petroleum Revenue Tax would boost investment and production at a negligible static cost but would almost certainly be fiscally positive on a dynamic basis.
4. Top 45% Income Tax rate
Despite being cut from 50% to 45% in the last Parliament, the top rate of income tax is still very high by international standards. The global average is 31.1%, the OECD average is 41.6% and the EU average is 37.8%. Such high rates of income tax, in combination with national insurance and the withdrawal of the Personal Allowance creates effective marginal tax rates which damage entrepreneurship and work incentives. As Alex Howard pointed out, the HMRC analysis showed that after behavioural changes, cutting the 50% rate to 45% would only reduce revenues by £100 million. However, even this uses a taxable income elasticity of 0.45 based on a cautious estimate using data from the 1980s. Given increasing labour market mobility, it is quite possible that taxable income elasticity could be 0.55 which would have meant cutting the rate would have led to a £600 million increase in revenue. The Government should examine this again and consider the implications on economic growth alongside behavioural changes. If after that thorough dynamic analysis, the 45% rate raises little or no revenue, it should just be abolished.
5. Corporation Tax for small businesses + 6. Capital Gains Tax for investors in small businesses
In The Road from Serfdom published last year, we advocated abolishing both corporation tax for small businesses and capital gains tax for investors in those small businesses. It is often forgotten that the average British company only has five employees and that 90% of all companies in the UK are small businesses with fewer than 50 employees; these small businesses account for half of all UK private sector employment. Of those without jobs in 2010 and who have since found private sector jobs, almost three quarters have done so in start-ups or small businesses. Abolishing these taxes will lead to greater investment, employment and economic growth and our modelling suggests that the budget deficit could even fall faster over time than under the OBR baseline. As I wrote last year, this is not a state hand-out or a new bureaucracy but a big, bold, self-financing tax cut which will empower small businesses, boost jobs, increase competition, drive up living standards and deliver more freedom and independence from Big Government and Crony Corporatism.
7. Employee National Insurance Contributions
National insurance contributions are, of course, a tax in all but name. Whilst we can’t abolish employee national insurance contributions outright, they should at least be merged with income tax to create a single Earnings Tax. CPS Research Fellows Michael Johnson in NICs The end should be nigh and David Martin in Abolish NICs have highlighted how merging income tax and national insurance would be an important simplifying move which would cut administrative and compliance costs. There are of course issues with pensions, the IT systems and employer national insurance contributions. Nevertheless, in the long run, the benefits of greater transparency and simplicity are likely to dominate. It is therefore highly encouraging that the Office of Tax Simplification is examining this issue in detail and that the Government will consider proposals for the abolition of NICs.