Raise some taxes now alongside bold stimulus package for ‘balanced recovery’, says IPPR

Think tank says reforms to four key taxes would lay foundation for a fairer and stronger post-pandemic economy

Some taxes can be raised this year without stifling the recovery, especially if the Chancellor commits to a major stimulus package alongside them, according to IPPR. In a new report, the think tank identifies four priority tax reforms: capital gains tax, corporation tax, wealth tax and a land value tax - that could make the system more balanced. These would also collectively raise up to £55 billion for the Treasury.

Researchers from the IPPR Centre for Economic Justice argue that raising certain taxes now could ensure the recovery is more balanced, more sustainable, and could prevent inequality from escalating further.

They estimate that these reforms would have minimal impact on the speed of the recovery, if they were accompanied by a major stimulus package. Moreover, they would lay the groundwork for a fairer and more prosperous post-recovery economy. Last week IPPR urged the Chancellor to ‘boost it like Biden’ and calculated that a UK recovery stimulus of around £190 billion was needed to fully restore jobs, investment and public services.

The researchers argue that while more wide-ranging reform of the UK’s lopsided and unfair tax system is needed eventually, those tax reforms that have a limited short-term impact on growth should be prioritised this year, starting in next week’s budget.

The IPPR report sets out four criteria that tax reforms must meet this year must meet. They must protect the incomes of those already hardest hit by the crisis; make the tax system more efficient by reducing unfair advantages, biases and loopholes; have low impact on investment and spending needed to boost the recovery; and future proof the economy, such as by encouraging the growth of green sectors.

Following these guiding rules, the report urges the chancellor to begin to address some of the most glaring problems of the UK tax system and raise more funds by:

• Reforming capital gains tax - Income from wealth – in the form off capital gains and dividends - should be taxed at the same rate as income from employment. The current imbalance overwhelmingly benefits the wealthiest and correcting this disparity by equalizing taxation of income from wealth and income from labour could raise up to £33 billion per year.
• Raising corporation tax – The UK shouldn’t be leading a global race to the bottom on corporation taxation. Reversing the tax cuts of the last decade and restoring the rate to 24 per cent could raise £13 billion a year and the UK would remain globally competitive. This tax is only levied on profits, so struggling firms will not be negatively impacted.
• Reforming wealth taxes - Despite wealth disparities being central to rising inequality, wealth taxes are at an historic low. To reform them, the current inheritance tax system should be abolished and replaced with a lifetime gifts tax, which would be fairer and more efficient. IPPR estimates this could raise an additional £9 billion a year.
• Beginning reform of land and property taxes - The UK’s current system of land and property taxation is inefficient and detached from real economic values. To address this, business rates for commercial properties should be replaced with a land value tax – proportional to the underlying value of land. And for non-commercial property, council tax and stamp duty should be replaced with a proportional property tax – proportional to the present-day-value of homes.

The researchers argue that any short-term impact caused by these reforms would be dwarfed by the overall beneficial growth that a major stimulus could bring.

Carsten Jung, IPPR senior economist, said:

“We must move away from the binary debate on tax rises and the recovery. The fact is, some taxes, like corporation tax and capital taxes, can be raised now without slowing the recovery, as long as they are accompanied by a big stimulus.

“For a balanced recovery, we cannot afford to leave the fault lines of our broken tax system untouched. The very low taxes on the wealthiest and corporations widen inequality, are bad for the economy and put public finances on a shaky foundation. With many businesses and wealth owners having benefitted from unprecedented government support measures throughout the pandemic, it is only fair for those who can afford it to contribute their fair share for a sustainable recovery.

“After the pandemic, further tax increases may be needed to put the public finances on a sustainable footing in the medium term. The exact size of this will partly depend on how quickly the economy bounces back – which is why we need a major stimulus, similar in ambition to that proposed by US President Biden – to drive rapid recovery.”

Shreya Nanda, IPPR economist, said:

“The economic effects of this pandemic have been hugely uneven – some businesses and households have racked up huge debts, while others have seen large gains. In order to ensure that the costs of the pandemic are fairly shared and that the recovery isn’t held back by debt, those who have gained must pay their fair share, and that those who have lost out should receive the support they need.”

ENDS

Shreya Nanda and Carsten Jung are available for interview

CONTACT

David Wastell, Head of News and Communications: 07921 403651 d.wastell@ippr.org

Robin Harvey, Digital and Media Officer: 07779 204798 r.harvey@ippr.org

NOTES TO EDITORS

1. The IPPR paper Tax and recovery: Beyond the binary by Carsten Jung and Shreya Nanda is available at: https://www.ippr.org/research/publications/tax-and-recovery
2. Advance copies of the paper are available under embargo on request
3. Figure 1 shows that the tax reforms would raise up to £55 billion while having a minimal impact on the recovery.

The short-term GDP drag is dwarfed by the growth impact of stimulus spending

£ billion

Source: IPPR analysis of Nanda & Parkes (2019), Nanda (2019), Blakeley (2018), Roberts & Jung (2020), Jung, Dibb & Patel (2021). Note: For tax multipliers, we used estimates from the literature described in the briefing note. The average multiplier of stimulus spending is 1.03, as explained in Roberts & Jung (2020).

4. Last week the IPPR Centre for Economic Justice called for the chancellor to ‘boost it like Biden’ with a £190 billion UK recovery stimulus. The research, by Dr George Dibb, Carsten Jung and Dr Parth Patel, is available here: https://www.ippr.org/research/publications/boost-it-like-biden
5. In 2019 IPPR made the case for capital gains tax reform in the report Just Tax: Reforming the taxation of income from wealth and work by Shreya Nanda and Henry Parkes. It is available here: https://www.ippr.org/research/publications/just-tax
6. The landmark 2018 IPPR Commission on Economic Justice established a blueprint for a fairer and stronger economy. Among its 72 recommendations were a number of tax reforms including a rise in corporation tax. The final report of the commission is available here: https://www.ippr.org/research/publications/prosperity-and-justice
7. IPPR is the UK’s pre-eminent progressive think tank. With more than 40 staff in offices in London, Manchester, Newcastle and Edinburgh, IPPR is Britain’s only national think tank with a truly national presence. www.ippr.org