The UK’s tax take is rising, and is likely to stay high, but the system is not improving. The UK needs a tax strategy to support its economic strategy, using the tax system to boost shared growth. This paper, part of the Economy 2030 Inquiry, describes what a good tax strategy would look like and how to get there.
This paper finds that the tax system has got worse because politicians have not been consistent or honest in recognising that taxes are going up, creating an inefficient and unpredictable system. To improve matters, a good tax system would boost efficiency by taxing externalities and land first, and then maximise and share the proceeds of growth by taxing income and consumption fairly and consistently, whilst maintaining predictability and public support over the long term. The paper shows that a better system is possible by outlining a revenue-neutral package worth around 1 per cent of GDP comprising reforms to business, environmental, income and wealth taxes.
- The UK’s tax take is rising. From an average of 33 per cent of GDP over the 2000s and 2010s, it has now jumped to 37 per cent and is forecast to approach 38 per cent (and over £1 trillion) by 2027-28: a rise of 5 percentage points or nearly £4,200 per household
- Fuel Duty is expected to raise £24 billion in 2023-24, but our rapidly growing electric vehicle fleet does not face any equivalent tax.
- The combination of flat Council tax bills within bands, small differences in tax bills between bands, and valuations made in 1991 make Council Tax a highly regressive property tax. But a national flat-rate tax would create big losers in regions with high house prices.
- The Government should make permanent currently temporary full expensing of business investment within Corporation Tax, and ideally extend its scope to all investment, while keeping the headline rate stable over time.
- Business rates should exempt new construction and improvements from the tax base, so that the tax converges to a land tax.
- The VAT registration threshold should be cut to £30,000
- A new per-mile ‘Road Duty’ system should mirror Fuel Duty for electric cars
- Council Tax should move to a flat rate within Local Authorities based on up-to-date valuations, while the higher threshold for residential Stamp Duty should be made permanent and the rate on more expensive properties cut.
- Tax rates on different kinds of income should be equalised but very high marginal rates should be removed, through higher dividend and Capital Gains taxes and higher top National Insurance rates for the self-employed, offset by indexing capital gains to inflation, a cut in employer National Insurance, reinstating the Personal Allowance above £100,000 and abolishing the High Income Child Benefit Charge.
- The Government should reform taxes on pensions and inheritance to raise more revenue and make them more progressive
For all research queries about this report, please contact Adam Corlett. For press queries, please contact the Resolution Foundation press office.
Adam Corlett
Principal Economist,
Resolution Foundation
Email Adam