Tax Policies and Growing the British Economy
Whilst all the major parties talk about economic growth in their manifestos there are actually very few concrete ideas in the manifestos from a tax angle, which are designed to actively support the overall growth of the UK economy
It is interesting to note that whilst all the major parties talk about economic growth in their manifestos and many (e.g. Labour) appear to be depending (at least officially) on funding their probable spending commitments after the Election through growth, there are actually very few concrete ideas in the manifestos from a tax angle, which are designed to actively support the overall growth of the UK economy.
Indeed, if you look at the ideas in some manifestos (e.g. Reform and Green), the tax ideas which are promoted are likely to significantly damage the UK economy in the short term. For example, increasing the personal tax allowance for individuals to £20,000 and introducing a corporate tax free allowance of £100,000 would simply encourage inflation and help create a Truss / Kwateng budget deficit.
So what steps could the Government actually take, which would help the UK economy develop and British firms grow (in no particular order of importance):
1. Corporation Taxes
Whilst it is easy to promise firms a cut in the CT rate (presently 25%) or other ‘give aways’, I suspect promising firms stability for the next 5 years (both in terms of the default tax rate which applies but also from a ‘tax base’ perspective) are more important to most businesses, as they will provide certainty re the tax position, which will in turn help firms with their decision making.
Perhaps the only change which a Government should make is the extension of ‘full expensing’ to allow this relief to also be available for leasing costs.
2. VAT on small businesses;
As things presently stand, UK businesses don’t need to register for VAT if their turnover is under £90,000 per annum (though they can register on a voluntary basis, if they so wish). Whilst on the one hand this high threshold minimizes the VAT burden for many smaller, ‘one man’ businesses, the VAT registration threshold is high compared to international comparisons and most academic studies, suggests it acts as a blocker to growth for smaller businesses. Hence, it could be sensible to reducing the VAT registration threshold to say £30,000 per annum, to encourage these smaller businesses to pro-actively grow and develop.
3. Stamp Duty;
Stamp duty is consistently held by tax academics (and indeed many parts of the property market generally), for example, to be a ‘bad tax’. The fact that it punishes people looking to move, for example, for job-related reasons, also reduces labour flexibility in the economy generally and hence damages the economic prospects of UK Plc. It also acts as a particular blocker for first time buyers, who are looking to get onto the property market.
Moreover, whilst various Governments have ‘fiddled’ with stamp duty (e.g. during Covid), economists accept that such fiddling doesn’t really remove the problems caused by Stamp Duty and indeed, stamp duty holidays typically just force up the underlying price of the property and reward vendors rather than purchasers. As such, removing Stamp Duty Land Tax totally makes sense.
The problem however? It brings in ca. £4bn per year for the Treasury, so there will be a need to find some source of additional revenue to cover anything lost via the removal of Stamp Duty Land Tax. However, perhaps updating Council Tax – which dates from the early 1990s and is hence massively ‘out-of-date’ and introducing new, higher value bands for the most expensive properties could help flex up the property market whilst insuring that enough taxes are collected.
4. Income Tax and Employee NICs
Whilst taxpayers traditionally think of NIC as ‘not a tax’ and paying for their state pension or whatever, the reality is that from an HM Treasury perspective it is is absolutely ‘just another tax’. As such, it makes sense to assess whether income tax and employee NIC should be merged into one tax (as the Dutch have done, for example).
Alternatively, you can keep income tax and NICs separate – which might be slightly easier politically – but ensure that the scope of NICs is expanded, so that it is also charged on letting income, dividend income and the like. After all, how can one genuinely justify a lower effective overall tax burden on unearned income compared to wages / salaries (and self-employed profits)?
Moreover, if the Government were to extend NICs to letting income profits, for example, the extra tax revenue that this brings in could be used to provide additional tax relief in other areas. For example, people on Universal Credit who work a few extra hours (or get a pay rise), typically end up with an effective marginal tax rate of 55% on their additional income. Using the additional revenues from the expansion of NICs would help reduce this tax rate (and the consequent ‘under-employment’ that it creates, with all the costs that such under-employment create for the wider UK economy).
5. The Apprentice Levy and Tax Relief on Training
The apprenticeship levy is designed – at least officially – to encourage businesses to invest in the training and development of their staff. Whilst this sounds wonderful in principle, many forms of training are ineligible for relief and hence, in all too many cases, the levy simply becomes another tax on businesses (and in particular on employees).
As such, either the rules around the use of the levy need to be totally rewritten, so that all meaningful business training by an employer qualifies for relief – or the levy totally removed.
6. Updating income tax reliefs for the 21st Century
The UK tax legislation – in particular with regard to income taxes – includes a number of limits which are simply ‘out-of-date’ and unfit for the 21st Century. For example, the limits on tax free relocation costs (£8,000) and tax-free termination payments (£30,000) have not changed in over 30 years.
As such, they act as a disincentive to people looking to move jobs and / or relocate because of a job and are another blocker on the idea of a flexible, dynamic UK economy. Whilst it is difficult to say what the costs of updating these limits would be, so that they are ‘up-to-date’ and reflect the impact of inflation over the last 30+ years, if they encourage more entrepreneurial behaviour on the part of employees, there is every reason to argue that the increase in these thresholds would ‘pay for themselves’ via improved economic performance.
In practice, the above steps are not some ‘miracle cure’ – they won’t resolve all the problems we presently see with the UK economy and the UK’s relatively poor ‘productivity’ when compared to other countries. However, they are an important first step to providing a solution and driving forward the economy specifically and the country generally.