Matthew Sinclair: In search of competitiveness

Matthew Sinclair of The TaxPayers' Alliance believes that the Redwood-Wolfson report on economic competitiveness should be welcomed by taxpayers.

The benefits of cutting corporation tax to Irish levels were established quite clearly by research into the dynamic impacts of such a move by the Centre for Economics and Business Research for the TaxPayers’ Alliance.  They found that the scale of the ‘shadow economy’ and tax evasion would decline, reducing the burden that law-abiding taxpayers have to pay to compensate for tax lost to fraud.  International footloose investment would come to our shores and increase the size of the tax base.  There would be general improvements in competitiveness sufficient to boost GDP by 9% if we moved towards Irish levels of corporate taxation over nine years.  Importantly, such a cut in corporation tax would more than pay for itself within nine years, substantially reducing public borrowing in the process.  Redwood’s, more cautious, proposals would lead to similar effects though not on the same scale.

Reducing the pain of inheritance tax would be incredibly popular – polling for the TPA suggests that it is the second most hated tax after Council Tax.  It is also very sensible.  These changes would go a long way to lessen the injustice of IHT on the ‘unwise and unfortunate’ who either die suddenly or who do not have the wherewithal to avoid the tax.  Inheritance tax causes massive social harms as grieving families are hit with bills that they struggle to pay without selling homes or family businesses.  At less than 1% of total tax revenue IHT is far from essential to funding public services and many other countries, including such socialist utopias as Sweden, have abolished it entirely.  The government’s own Gershon Review identified £21 billion of savings, more than enough to pay for the abolition of inheritance tax, which only raises £3.6 billion last year.  Redwood’s proposals, by exempting the main home from inheritance tax, are a good step in the right direction.  Applying a rollover relief to the new short-term capital gains tax, such as operates in Ireland and Australia, would take the reform further, meaning that grieving relatives only pay tax on inherited assets if they sell them – a much fairer proposition.

Finally, recommendations to cut regulation have become one of those perennials of British politics that the public have, unfortunately, become quite cynical about.  However, Redwood’s proposals are aggressive enough that, if prioritised by an incoming government, they could make a genuine difference to businesses, especially smaller companies for whom the burden of regulation is particularly onerous.

This report raises two questions.  First, will the Conservative leadership adopt the recommendations?

They should, because these recommendations are not just economically sensible but also a good idea politically.  Inheritance tax is not only the second most hated tax but hits hardest around the many marginal seats in the South East of England and London.  As people become more aware that government spends their money poorly - the European Central Bank estimates that 16% of public spending is wasted because Britain’s public sector is less efficient that that of other countries – they believe that they can spend it better themselves.

Unfortunately, the early signs from George Osborne are that these will remain aspirations and the plans that the leadership eventually adopts will be limited to tax-neutral changes and minor simplifications.  The leadership could do so much more to make the case that even with small amounts of growth they should be able to find the money for the modest proposals contained within this and the earlier Forsyth report over a Parliament.  Even within the framework that they have outlined, without making specific pledges, they could do much more to make the case that a Conservative government will mean lower taxes.

The second question is whether economic competitiveness will be sacrificed on the altar of the green agenda.  Redwood argues correctly that growth in the UK has been lopsided, too reliant upon London’s bustling financial services industry.  However, green taxes could well exacerbate this trend with any increase in taxation on industrial carbon emissions hurting Northern manufacturers and any increase in the costs of road transport hitting companies that need to move goods around the country.  Equally, many environmental policies involve big increases in regulation, for example the government’s own regulatory impact assessment suggests that the European Union Emissions Trading Scheme is costing £62 million per year in administration costs alone. Will George Osborne argue the competitiveness case if it comes into conflict with measures being proposed by the forthcoming Quality of Life group?

The Economic Competitiveness Policy Group, and the Forsyth Commission and Social Justice Policy Group before them, have set out some welcome proposals for reducing the burden of government upon business and ordinary taxpayers.  We have to hope that the Conservatives will prioritise them over unnecessary political caution and unjustified increases in green taxation.