UK comes 22nd out of 36 OECD countries in 2020 International Tax Competitiveness Index, published today by the US-based Tax Foundation.
16 European countries are already outperforming UK on tax competitiveness.
The UK currently ranks 33rd out of 36 on property taxes, 17th for corporation tax and 24th on personal income taxes.
Tax rises on business reportedly being considered by the Treasury would see UK fall to 30th out of 36 countries, with the least competitive tax regime for personal income in the OECD
New CPS briefing paper, published alongside the Index, explains why these tax rises are misguided, arguing that they would hit economic growth at the worst possible moment.
CPS and Tax Foundation to produce joint report on what a more competitive and pro-growth UK tax regime would look like.
This study measures the competitiveness of all OECD countries by analysing corporate taxes, income taxes, property taxes, consumption taxes, and international tax rules, and assessing how pro-growth these regimes are.
For the seventh year in a row, the Tax Foundation has found that Estonia’s tax code is the most competitive and least distorting, while Latvia comes in 2nd place, followed by New Zealand (3rd), Switzerland (4th), and Luxembourg (5th).
However, joint research by the Centre for Policy Studies and the Tax Foundation has found that if the Government proceeds with its reported plans to raise corporation tax, capital gains tax and dividend tax, the UK’s international tax competitiveness would plummet.
In the absence of any compensating pro-growth measures, such a move would see the UK fall from 22nd to 30th place on the Index, leaving it slightly less competitive than Greece, and significantly worse off than the United States, Germany, and Australia.
The report shows that the UK’s tax regime is already significantly less competitive than is generally realised.
Despite having the fourth-lowest corporation tax rate in the OECD, the UK only comes 17th for corporation tax overall because of its ungenerous approach to business investment allowances. Increasing corporation tax to 24%, as has been widely reported, would see the UK’s ranking in this category dropping to 25th place out of 36.
The UK ranks 24th for personal income taxes in 2020. The top rate of tax on ordinary earnings is slightly above the OECD average, while the current capital gains tax regime is relatively competitive. However, the UK’s top rate on dividend income is the fifth highest in the OECD.
The personal income taxes picture would worsen significantly if mooted changes to dividend and capital gains tax rates were introduced. If these rates were fully aligned with income tax, the UK would fall to the bottom of the league table (36th out of 36). The UK would be left with the second-highest top dividends tax rate and the highest top capital gains tax rate (on shares) in the OECD.
On property taxes, the UK ranks third last (33rd out of 36) among other OECD countries, while raising more as a percentage of GDP from recurring property taxes (such as council tax and business rates) than any other OECD country.
In a briefing paper published today alongside the global ranking, the CPS highlights why the suggested increases are flawed and would hinder economic growth.
The Centre for Policy Studies has been working with the Tax Foundation on a revenue-neutral plan for what a more competitive and pro-growth UK tax regime would look like. This will be released in the coming weeks.
Tom Clougherty, Head of Tax at the Centre for Policy Studies, said:
“The Covid-19 pandemic, and the necessary economic response to it, have wrought havoc on the government’s budget deficit. But trying to close the fiscal gap now, 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.
“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. Whatever short-term revenue boost such measures yielded would likely be outweighed in the medium term by a drag on economic growth. Britain cannot afford to take its tax competitiveness for granted.”
Daniel Bunn, Vice President of Global Projects at the Tax Foundation, said:
“The challenge that the pandemic has created for public finances should be met with sound policies for the longer term. Now is not the time for tax hikes, however.
“The UK should focus on policies that support workers and business investment. A stronger tax base can come with growth, but increasing rates now will work against an economic recovery. Reforms that improve competitiveness can set a better trajectory for the UK.”
The CPS’s briefing note ‘Wrong Taxes, Wrong Time’ is available here. It draws on fresh Tax Foundation analysis of the impact of increased business taxation on the UK’s tax competitiveness
The Tax Foundation is the world’s leading independent tax policy research organization. Since 1937, its research, analysis, and experts have informed smarter tax policy in the United States and abroad. Its Center for Global Tax Reform produces timely and high quality data, research, and analysis on taxation in countries around the world that influences the debate toward economically principled policies.
The Centre for Policy Studies is Britain’s leading centre-right think tank, named by Conservative MPs in polling by ComRes as the most influential think tank in Westminster. Its mission is to promote enterprise, ownership and opportunity.
The CPS and Tax Foundation have been working together on a joint project on what a more competitive UK tax system would look like, as part of the CPS’s ‘Going for Growth’ agenda