By: Joanna Marchong, intern at the TaxPayers' Alliance
The Tax Foundation has published its updated figures for the annual International Tax Competitiveness Index. The purpose of the report is to compare and rank how well OECD countries promote economic growth and investment through competitiveness, dictated by the effectiveness of certain aspects of their tax systems. Last year the UK scored 26th out of 38 OECD countries. This year, however, the rankings paint a rather disheartening picture, the UK plummeting to the 30th spot.
The drop in rank is not merely an arbitrary fluctuation. It’s emblematic of deeper-rooted issues within the UK's fiscal landscape - the 70 year tax burden, the overarching cost of government and the biggest tax raising parliament on record.
The report highlighted three weaknesses of the UK tax system:
- The top personal income tax rate on dividends is 39.35 percent, well above the OECD average (24.2 percent).
- The real property tax burden is the highest in the OECD.
- The VAT at a rate of 20 percent applies to less than half of the potential consumption tax base.
One pivotal factor contributing to the decrease in tax competitiveness in the UK is the current state of corporation tax. The UK has witnessed a remarkable increase in its corporation tax rate. Last year it stood at 19 per cent, however, this year’s figures depict a different story, the rate has skyrocketed to 25 per cent and we are already beginning to see the consequences attached. The abrupt increase makes the UK a less attractive destination for companies looking to start their business, migrate to the UK or want to expand their businesses.
What relevance does an international leaderboard have to households, though? For most, including the government, price rises are the core issue. Inflation remains stubbornly high (it was unchanged in the latest figures) and that means our pay packets are not going as far as they should. The cost of living has increased and households are feeling the pinch especially as we circle back around to winter months to battle the cost of energy. But as well as sharp increases in the price of pretty much everything, from bread and butter to rent and restaurants, we’ve also seen a steady climb in the cost of the biggest bill for many: tax.
That’s the context of our fall in international competitiveness. Hikes in corporation tax feed through to wages and prices; freezes in tax thresholds eat into pay rises. A failure to look at simplification will continue to distort economic decision-making in myriad ways. The UK’s tumble in tax competitiveness is an issue that cannot be viewed in isolation. In the long term, an uncompetitive system of dividend taxation will deflate investment, leading us more open to inflation shocks in the future.
These figures serve as a sobering reminder that addressing these fiscal challenges is essential for promoting economic growth and attracting investments. The chancellor, Jeremy Hunt, is insistent that taxes cannot be cut at the autumn statement. But as the Centre for Policy Studies have pointed out, even if this were true, there is a whole range of revenue neutral taxation changes which would dramatically improve our standing. Not all of these would be popular, but the refusal to even consider them shows a lack of imagination.
The TPA have of course put forward our own manifesto on taxation, the Single Income Tax, which calls for the abolition of eight taxes and the creation of just one. If anyone from the Treasury is reading, it might just be time to take a look.