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Tax systems can play a central role in creating fairer and more efficient economies. Economic growth increasingly depends on the quality of public goods that only governments can provide, such as education, healthcare, and childcare. Taxing high incomes too lightly will increase inequality, which can damage social and political cohesion and weaken economic growth, as acknowledged by the IMF.
Many economists agree as to what constitutes a fair and efficient tax system. They believe the tax base, the activities and entities on which taxes are levied, should be as broad as possible, with few ad hoc deductions and exemptions. It could be made more progressive, with taxes levied according to taxpayers’ ability to pay. Some propose that tax systems could penalise activities that do harm, such as pollution or financial speculation.
The Institute for Fiscal Studies identifies a programme of tax reform for the UK in the final report of a major review led by the late James Mirrlees.
In the Journal of Economic Perspectives Henrik Jacobsen Kleven cites reasons why Scandinavian countries are able to levy so much tax. These include broadness of their tax base; the subsidisation of goods, such as childcare, that make it easier to work, and public tax returns.
This report from the Center for American Progress explains how cutting taxes on one form of income can mean pushing up taxes on another.
A coalition of charities, think tanks and NGOs, including Oxfam UK and Christian Aid, has called for progressive reform of the tax system, in preparation for a fairer post-Covid world. Demands include no bailouts for those seeking to avoid tax and proper and fair taxation of wealth.
A four year commission of inquiry by LSE and the Lancet proposed raising £102bn through tax increases over the next ten years to properly resource the NHS, social care and public health. The plan had been drawn up by the IFS’s Paul Johnson and Prof Anita Charlsworth, director of research and economics at the Health Foundation.
The UK’s top rates of income tax were cut sharply in the 1980s. The Conservative government believed that this would encourage the wealthy to work harder and save more. It was hoped this would boost investment and economic growth enough to offset the loss of tax revenue. Investment and growth actually weakened.
Cuts to top rates of income tax have reduced the gap between the tax rates levied on high and low incomes. This has boosted inequality and has no significant effect on economic growth or unemployment. Proposals for reform of income taxes tend to focus on raising tax rates on higher incomes to make the system more progressive. Reformers in the UK have proposed "smoothing" the uneven marginal rates which currently characterise the income tax schedule.
A report from the University of Cagliari finds that marginal rates of income tax have a statistically insignificant impact on economic growth.
Professor Simon Wren-Lewis lays out the political as well as economic reasons for high top rates of income tax.
The IPPR report Tapering Over the Tax recommends merging income tax and National Income Contributions, and replacing income tax bands with a taper-system. The authors claim this would be more progressive, better incentivise work and leave room for raising significantly more revenue from income tax.
The Resolution Foundation proposes a Health and Social Care Levy that, combined with changes to National Insurance, would raise substantial revenue, protect lower-income households and reduce tax distortions that incentivise self-employment.
A person earning £40k a year from their job pays more tax than someone living off £40k a year in capital income from their accumulated or inherited wealth.
Tax rates on capital income have been cut by more than those on income from work, despite property and financial wealth rising more rapidly. UK tax rates levied on dividend payments and capital gains are now lower than the equivalent labour taxes.
The rationale governments give for taxing capital so lightly is that it encourages entrepreneurship and therefore improves economic performance. Research from the Institute for Fiscal Studies shows lower UK rates of capital gains tax have not boosted investment.
The Institute for Fiscal Studies report on owner-managed businesses shows that low rates of capital gains tax on business income can lead to large tax savings but will not boost investment.
The Resolution Foundation report Who owns all the pie? examines how UK wealth has grown more rapidly than income and looks at the scale of wealth inequality.
This report from the Washington Center for Equitable Growth explains how the US should go about raising more tax on capital income. It lays out both major structural reform and intermediate steps that could be taken by policymakers.
The proportion of total UK tax revenues raised from taxes on property, wealth and inheritance are low, with only property taxes raising significant sums.
Parents and property are the best predictors of life chances, but the best policy tools for correcting this – wealth and inheritance taxes – are highly unpopular, even with those who would not have to pay them.
Wealth inequality reduces economic dynamism. Households with no wealth or savings lack the security to take new risks, such as entering education or starting a business.
Higher taxes on capital income, property and inheritance, or net wealth could help to tackle wealth inequality. Property taxes could focus on ownership rather than residency, as is the case with the UK’s Council Tax. Unpopular inheritance taxes might be replaced by taxes on lifetime wealth transfers or recurrent taxes on net wealth.
This IPPR report on tax reform calls for all income from wealth to be taxed under the income tax schedule, inheritance tax to be replaced with a lifetime donee-based gift tax, and Council Tax by an annual property tax.
The Washington Center for Equitable Growth argues that a US wealth tax would increase productivity while reducing inequality.
A report from the Russell Sage Foundation of Social Sciences - How Wealth Inequality Shapes Our Future - shows how wealth and wealth inequality are intertwined with nearly all aspects of economic and social life.
The UK has the lowest rate of corporate taxation in the G7 group of wealthy countries, at just 19%. Despite this, business investment in Britain is easily the lowest in these economies.
Tax rates are not the key factor in determining the profitability and the attractiveness of investments; more important factors are the availability of skilled labour and efficient infrastructure, and the overall demand in the economy. These require government spending and investment.
Corporate taxation can be highly progressive because it is primarily paid by shareholders, and share ownership is concentrated among the wealthiest groups in society. In recent years a number of multinational corporations have paid very low taxes in some countries, because they have managed to shift their declared sales and profits to countries with lower tax rates.
Governments fear losing investment and tax revenues to other countries. This has led them to cut corporate tax rates. This combination of tax avoidance and “tax competition” is eroding overall tax revenues and allowing many of the largest firms to pay very little tax.
Simon Tilford argues that tax competition is not only cutting revenues, but undermining competition and fuelling monopoly.
The National Bureau of Economic Relations reports that close to 40% of multinational profits are shifted to tax havens globally, and that urgent action is required to prevent this practice from further aggravating inequality.
A World Bank blog calls for governments to improve the equity of the tax system, including through closing international loopholes for corporations and individuals
The IPPR proposes an "alternative minimum corporation tax" based on national sales revenues, to be levied on multinational corporations that consistently declare low or zero profits.
The Biden administration has released plans for a global minimum corporation tax with its “Made in America Tax Plan”. Tax Justice UK estimates that the American proposals would translate to a £13.5 billion increase in annual tax revenue for the British government.
The IMF has proposed an additional and temporary ‘solidarity tax’ to reduce social inequalities exacerbated by the pandemic. Director of the Fiscal Affairs Department told the FT that “a symbolic rise in taxation from those who have prospered over the past year would strengthen social cohesion even if there was not a pressing need to repair the public finances.”
Burning fossil fuels can have economic, environmental and social costs. It is widely considered fair and efficient to require energy users to bear these costs.
Carbon and other environmental taxes also encourage more efficient use of energy and resources, reducing environmental impact. Under the EU’s Emissions Trading Scheme, carbon emissions from the power and industrial sectors are effectively taxed, though not at a very high rate.
Petrol and diesel are taxed more highly, but these taxes have been frozen in the UK in recent years. Aircraft fuel is not taxed at all. So there is a strong case for a more comprehensive system of carbon taxation.
Taxes on consumption are regressive, with poorer consumers tending to pay more as a proportion of their income. Carbon and environmental taxes need to be carefully designed to ensure that they are perceived as fair.
The Grantham Institute at Imperial College London has designed a framework for fiscal reform for climate action, including tax reform. It argues that the public may be more prepared to pay higher taxes if it is earmarked for specific green investment.
Common Wealth and the New Economics Foundation set out principles for green tax reform. They argue that doing so must help to contribute to rapid decarbonisation, address inequalities, and support global solidarity.
The ‘A Free Ride’ campaign is behind proposals for a frequent flyer levy, with underlying modelling conducted by the New Economics Foundation. Under the levy aviation taxes would increase for every additional flight taken by an individual in a year.
