Emma Revell: Our tax system is labyrinthine and rather than bringing money in it makes the UK less competitive

Emma Revell is External Affairs Director at the Centre for Policy Studies.

It won’t be news to anyone that the UK’s tax system is unfathomably complicated.

Regardless of whether you think taxes should be higher or lower, more evenly distributed or skewed towards the rich, a member of ConservativeHome’s faithful readership or someone checking in from the other side to see what those awful Tories are up to, you probably broadly agree that having a tax code that is longer than the King James Bible – and growing every year – is not good for anyone.

Compliance costs skyrocket and gaps open up for the rich and well-advised to minimise their exposure. Businesses are put off from expanding or investing in the UK in the first place. People deliberately restrict their working hours to keep themselves below certain thresholds.

It’s all deeply familiar, and deeply depressing.

Less well known is how particularly bad the UK system is compared to those countries we would most often consider our counterparts.

Enter the US-based Tax Foundation’s International Tax Competitiveness Index.

The Index uses over 40 measures, organised into five categories, to assess the tax systems of the world’s developed countries. It does not make a judgement on the level of taxation levied, instead measuring the effectiveness of the system itself – how good it is at raising taxes while minimising the negative, distortionary effects.

On this metric, the UK is astonishingly poor, with our rank this year sitting at 32nd out of 38 OECD countries – ahead of only Italy and France in the G7. In the decade the Index has been running, we’ve only ever reached as high as 29th (in 2021 and 2022).

Of the five categories, there is one ray of sunlight: we sit in 2nd position for cross-border taxation, owing to the large number of international treaties we have in place. On everything else, however, the track record is pretty bleak. On consumption and property taxes we sit towards the bottom of the pile in 33rd and 37th respectively, with little movement over the last 10 years. On income taxes, we have bobbed up and down in the mid-20s, dropping to 25th this year (thanks to Labour’s tax rises). The biggest drop, though, was on corporate taxes, where we fell several places down to 28th as a result of the previous Conservative government’s decision to hike corporation tax to 25 per cent. Had it been kept at 19%, we would have had the fourth-lowest rate in the OECD.

Each year the Centre for Policy Studies works with the Tax Foundation on some UK-specific analysis, to look at what could be done going forward to hopefully boost us up a few places.

Our analysis shows that 32nd is actually the same place the UK sat in last year’s Index, but as mentioned above, that position was cemented by poor decisions made by Rachel Reeves in her first Budget. The rise in the higher rate of Capital Gains Tax and the changes to Employer’s National Insurance pushed the UK down five places on the Index’s individual taxation measure.

With another Budget just around the corner, all eyes will be on whether the Chancellor can make things better, or at the very least not make them much worse.

Somewhat positively, Reeves and the rest of the Treasury seem unmoved by calls for a wealth tax thus far. Let us hope that she does not waiver. Wealth taxes, as mooted by a range of left-wing activists, MPs and academics, would be a patently awful move. We would fall to the bottom ranking in the property taxes category and sink two places overall.

The CPS briefing recommended three measures that would boost our international tax competitiveness. While they are less likely to be well received by the current Treasury, given they would have hefty upfront price tags, it would serve the Conservatives well to think about adopting any or all of them as their stream of policy announcements for a future administration continues.

First, abolish stamp duty for good, across the board. Kemi Badenoch’s announcement that a future Conservative government would abolish the tax on the sale of primary residences was a very welcome step, but there is scope to be much bolder. The UK is one of the few countries to levy stamp duty on the purchase of shares, currently 0.5 per cent. This makes little economic sense as it depresses the share prices of UK companies, raises the cost of capital, suppresses investment, and makes the UK a much less attractive business destination. It also penalises savers who invest in UK companies, the very opposite of what the current government is trying to achieve.

Second, lower the corporation tax rate back to 19 per cent. The OECD itself recognises the damaging impact high corporation taxes have on growth and investment, noting that ‘corporate income taxes are the most harmful for growth as they discourage the activities of firms that are most important for growth: investment in capital and productivity improvements’.

Successive governments, over several decades, steadily cut the headline rate from over 50 per cent. As Chancellor, George Osborne was responsible for reducing the rate from 28 per cent to 19 per cent but it was then raised to 25 per cent in 2023. Labour have promised to not increase this, but both parties would do well to reconsider – returning our rate to 19% would boost our corporate taxation rank 16 places, to 12th, and our overall rank would improve one place to 31st.

Third, build on the success of the full expensing regime by widening the scope. In 2023, Jeremy Hunt praised the work of the CPS and others in making the case for full expensing, under which the UK currently allows the cost of selected plant and machinery to be deducted. We calculated that doing so would increase capital stock by 1.5 per cent, raise wages by 0.8 per cent and GDP by 0.9 per cent. However, widening the policy to all plant and machinery as well as structures and buildings could increase capital stock by 5.7 per cent, raise wages by 3.0 per cent and GDP by 3.4 per cent.

Now, this isn’t going to happen overnight.

The upfront cost of these changes would be significant, far beyond what the public finances could currently afford. Our analysis suggests a maximum cost of £75 billion in 2029-30. However, the dynamic effects of these changes mean the actual cost would be much lower, and the costs could be offset by spending cuts or increases to less damaging taxes.

As my colleague and author of the briefing Daniel Herring has said, ‘The tax system is bursting with so many damaging taxes that are ripe for reform.’ Improving the UK’s growth prospects, making us a go-to country for new investment, and shoring up the public finances should be the key missions of any government.

The measures outlined above would help with all three.