by Ben Ramanauskas, Policy Analyst
The Tax Foundation in the United States has published this year’s International Tax Competitiveness Index. It is a quality, comprehensive piece of work showing that many countries from around the world have seen the importance of reforming their tax system. A tax code which is simple makes it easy for individuals and businesses to comply and also removes loopholes which erode public trust in the system. Low taxes remove the burden on low-income households, allowing them to keep more of their own money. It also benefits businesses, who have more money to spend on their workers and investing in new equipment and training their staff, boosting productivity and improving living standards.
The Tax Foundation also rightly include ‘neutrality’ as a positive score - a neutral tax system means that people and businesses make decisions based on economic merits, not for tax reasons. The more neutral, the better.
The Tax Foundation score and rank every country in the OECD, which is made up of 34 developed economies. Unfortunately - although unsurprisingly - the UK has slipped down the rankings from 21st to a lowly 23rd.
We are doing relatively well in terms of taxes on businesses. Cutting corporation tax has been hugely beneficial to the economy, making the UK a more competitive place in which to do business. However, there is much more that could be done. We could, for instance, follow the example of the United States and allow firms to immediately deduct new spending on plants and equipment from their taxable income. Similar reforms in the US have led to higher wages, especially for workers on low incomes.
Things are much worse when it comes to taxes on individuals. There is a cost of living crisis in the UK, with many households on the lowest incomes struggling to get by. Taxation makes a significant contribution to this burden. Hard working people are seeing a significant proportion of their income taken from them in the form of income tax and national insurance contributions. We recommend a merger of these two taxes, ensuring protections for pensioners, so that there is more honesty in the system and so that we can start to reduce the burden to more reasonable levels for those on the lowest incomes.
The picture is even more grim when it comes to taxes on property. We have seen the high street decimated by business rates and low-income families driven to poverty by council tax. Capital gains tax punishes people for selling property if they have improved its value and removes their incentives for doing so.
However, by far and away the most damaging tax is stamp duty. It penalises people who want to downsize to a smaller home. The impact of this is that households are prevented from moving to a home which is most appropriate for them. The country is in the midst of a housing crisis, with many young people struggling to pay their rent and locked out of home ownership altogether. Stamp duty is playing a major part in this and should be halved immediately, and eventually abolished.
Estonia is Top of the Pops for the Tax Foundation, and rightly so. It leads the way for taxes on businesses, individuals, and property. Ahead of Monday’s budget, the UK government could learn a lot from Estonia’s example.
When Estonia gained its independence following the collapse of the Soviet Union in 1991, its people lived in poverty. Less than half the population had a telephone line and its only independent link to the outside world was a phone hidden in the foreign minister’s garden. Since then, it has transformed itself into a world leader in technology. It is the country which gave the world Skype, has one of the world’s fastest broadband speeds with near universal free wifi coverage, and holds the record for start-ups per person.
What was their secret? The new government slashed taxes for businesses and allowed a company to be registered in a matter of days. It also introduced a flat tax for individuals. These simple moves allowed the economy to flourish.
It also recognised the importance of technology, including for the public sector. Practically every interaction between Estonian citizens and their government takes place electronically. This removes the need for a bloated public sector meaning lower taxes and more people freed up to work in the private sector.
The UK should follow Estonia’s example. Not only in its approach to taxation, but also to the use of technology in the public sector. Research by the TaxPayers’ Alliance revealed that accelerating the uptake of automation in the public sector could release 850,000 public sector workers into the private sector, allowing them to plug the skills gap in the private sector as well as bringing about £17 billion in staff savings each year by 2030. This would be equivalent to a £700 per year tax cut per household in the UK.
Taxation allows us to provide essential services. However, we need to ensure that they are levied in a way which does cause financial difficulties for people, deter investment, or hamper businesses. We should look to other countries who have low and simple taxes and still manage to provide high-quality public services. And the Tax Foundation’s fantastic annual survey is an essential benchmarking tool to allow politicians to do exactly that.