Embargoed until 00:01, Friday 26th January 2024
- A review of more than 40 academic studies shows that the optimal tax burden for economic growth cluster between 20 and 30 per cent of GDP
- The UK’s tax burden currently stands at 36 per cent of GDP - and the chancellor has the fiscal headroom to cut taxes at the upcoming budget
- The campaign group says that while there are a large number of factors that contribute to growth, taxes are still a vital lever to pull to get Britain back on track
New research by the campaign group the TaxPayers’ Alliance (TPA) has found significant evidence that tax cuts can help to boost economic growth.
An in-depth analysis of the academic literature has found that a high tax burden depresses growth, investment and wages. A review of more than 40 academic studies concludes that the optimal tax burden for economic growth cluster between 20 and 30 per cent of GDP - with the UK’s tax burden currently at a post-war record high of 36.3 per cent and forecast to rise to 37.7 per cent in 2028-29.
The analysis comes as the chancellor Jeremy Hunt considers tax cuts in the upcoming budget, recently writing that “The most dynamic economies tend to be places with lower taxes. The lesson is clear: supporting businesses with competitive taxes - not more government spending - is the way to growth.”
Reports elsewhere suggest that instead of tax cuts, the treasury favours high immigration and other measures to boost growth.
What’s more, recent commentary on tax changes frequently focuses on the impact to treasury revenues over a single year, assuming that reductions in rates will leave persistent holes in budgets without properly considering the counteracting effects on growth further down the track.
The TPA notes a range of factors that influence economic growth beyond tax, including a credible grip on debt, borrowing and spending, skills, legal systems, education, population health, natural resources, infrastructure and cultural factors.
But while tax is not all-important, the evidence is clear that the tax is an important factor and any government serious about growth has to include bringing down the burden in its plan.
Extracts from studies finding cutting the tax burden is beneficial to economic growth:
Piroli & Pesschner, The Impact of Taxation Structure on Growth: Empirical Evidence from EU27 Member States, 2023: “Increasing the overall tax burden has a negative impact on growth in the long-run”
Alesina et al, The output effect of fiscal consolidation plans, 2015: “Fiscal adjustments based upon spending cuts are much less costly, in terms of output losses, than tax-based ones and have especially low output costs when they consist of permanent rather than stop-and-go changes in taxes and spending.”
Afonso & Jalles, Economic Performance and Government Size, 2011: “Our results show a significant negative effect of the size of government on growth.”
Johansson et al, Tax and economic growth, 2008: “a shift of 1% of tax revenues from income taxes to consumption and property taxes would increase GDP per capita by between a quarter of a percentage point and one percentage point in the long run”
OECD, Sources of Economic Growth in OECD Countries, 2003: “government expenditure and the required taxes may reach such levels where the negative effects on efficiency start dominating, reflecting an extension of government activities into areas that might be more efficiently carried out in the private sector”
Liebfritz et al, Taxation and Economic Performance, 1997: “a cut in the tax-to-GDP ratio by 10 percentage points of GDP (accompanied by a deficit-neutral cut in transfers) may increase annual growth by ½ to 1 percentage points (a somewhat larger effect than that found by the “top-down” approach).”
John O’Connell, chief executive of the TaxPayers' Alliance, said:
"When it comes to economic growth, tax isn’t everything but the evidence is clear that it’s much more than nothing.
“Politicians should remember that reducing the tax burden increases economic activity and investment, boosts productivity, and puts money back into family budgets.
“At the upcoming budget, the chancellor should set out a strategy to bring down the tax burden over time and implement immediate tax cuts to give taxpayers some well-earned relief.”
TPA spokespeople are available for live and pre-recorded broadcast interviews via 07795 084 113 (no texts)
Head of Campaigns, TaxPayers' Alliance
24-hour media hotline: 07795 084 113 (no texts)
Notes to editors:
- Founded in 2004 by Matthew Elliott and Andrew Allum, the TaxPayers' Alliance (TPA) campaigns to reform taxes and public services, cut waste and speak up for British taxpayers.
- Find out more at www.taxpayersalliance.com. TaxPayers' Alliance's advisory council.
- In 2012, the TPA published the Single Income Tax, the final report of the 2020 Tax Commission. One of the most comprehensive reviews of the UK tax system ever undertaken, it mapped out a much simpler, more transparent and less burdensome tax system.