Lifting capital gains tax (CGT) would damage the competitiveness of the UK’s already poor tax regime, new analysis suggests.
Research by the Tax Foundation suggests that the UK’s tax regime ranked at 30th out of 38 OECD countries in terms of competitiveness, up one place due to the introduction of the full-expensing policy last year.
The report, which assesses how pro-growth each country’s tax regime is, put Estonia at the top of the rankings, followed by Latvia and New Zealand.
Additional modelling by the Centre for Policy Studies (CPS) showed that many of the potential tax changes which are under consideration ahead of the Budget would damage the UK’s competitiveness further.
Chancellor Rachel Reeves is reportedly set to hike capital gains tax in an attempt to plug a £22bn blackhole in the public finances. Depending on the extent to which Reeves raised the levy, the UK could fall another two or four places in the rankings.
“Any increase of CGT rates without substantial reform of the capital gains base will be highly damaging,” Daniel Herring, CPS economic and fiscal policy researcher said.
If Labour were also to lift the higher rate of dividend tax to 45 per cent and introduce a wealth tax, the UK would fall to 35th place overall. In this case, only France, Italy and Columbia would have less competitive tax systems
“There’s a real danger that Britain could end up with one of the least competitive and most anti-growth tax systems in the OECD if the expected tax rises come to fruition in the budget,” Herring said.
Looking over the longer term, the competitiveness of the UK’s tax regime has barely improved at all over the past decade. In 2014, the UK was ranked at 29th place.
“The UK had an uncompetitive and anti-growth tax system in 2014, and it retains the same today,” Herring noted.
The UK performed particularly poorly in terms of consumption taxes and property taxes, ranking 33rd place and 34rd place respectively, while its ranking on corporate tax has fallen 18 places since 2019, when corporation tax stood at 19 per cent.
The report pointed out that the design of taxes was at least as important as the level, pointing to the need for pro-growth reform in the Budget.
“If Labour really wants long-term economic growth, it needs to get serious about fundamental tax reform. It’s not just about cutting taxes. The way we raise tax is damaging incentives, getting in the way of innovation, and undermining productivity,” Herring said.