Introduction
The Office for Budget Responsibility’s public finances databank provides a valuable tool to look at the tax burden, the ratio of national account taxes to gross domestic product (GDP).
While the data provided on tax receipts is comprehensive, it necessarily measures only the burden of taxes actually paid over by taxpayers. But taxes can have distortionary effects on economic activity, lowering growth and delaying investment decisions. This reduced investment and growth stifles GDP and wages.
A ‘real tax burden’ includes an estimate of the difference between what actual GDP is, and what it could be if an optimal tax rate were to be introduced. Recent public debate regarding economic growth and investment along with the role of taxation and the weight of the burden, not just on individuals and families but on the economy itself, means that this research should add to the discussion.
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Key findings
- If taxes were set at the growth-maximising ratio, GDP could be £834 billion higher (£12,349 per person) three years after implementation.
- Adding an estimate of £12,349 for the lost GDP per person caused by high taxes to the £12,225 per person collected in tax produces a real tax burden of £24,574 per person.
- At a national level, this would mean adding £834 billion of lost economic activity to the £825 billion paid in taxes to produce a total tax burden of £1.7 trillion.
- As a share of GDP, this means that the real tax burden equates to 70.8 per cent, double the official tax burden of 35.2 per cent of GDP in 2021-22.
- Dividing that by a notional, larger GDP that would result from a lower tax burden would still produce a real tax burden of 52.2 per cent.
- If taxes were set to meet the TaxPayers’ Alliance Single Income Tax recommendation where current receipts consume 33 per cent of GDP, then GDP would be £362 billion higher (or £5,366 per person) three years after being implemented.
- Accounting for the suppressed economic activity relative to the TaxPayers’ Alliance recommended optimal ratio of taxation and spending to GDP, the real tax burden could be 40.3 per cent of a GDP estimate that is revised up accordingly. As a share of existing GDP, this equates to 43.8 per cent, substantially greater than the official tax burden of 35.2 per cent of GDP in 2021-22.
- The official tax burden for 2021-22 of 35.2 per cent is the highest since the 1950 level of 36.1 per cent. It is 6.2 percentage points more than the Single Income Tax optimal recommended ratio and 14.2 percentage points more than the growth-maximising tax ratio.
- The official tax burden for 2022-23 of 36.4 per cent is the highest since the 1949 level of 36.9 per cent. The official tax burden for 2023-24 of 37.4 per cent is the highest on record. OBR records begin in 1948 at 37.2 per cent.