The UK’s International Tax Competitiveness: 2023 Update

• The UK ranks 30th out of 38 OECD countries in the 2023 edition of the International Tax Competitiveness Index, published annually by the US-based Tax Foundation. This is down three places from 2022.
• The UK ranks second for its cross-border tax rules, but comes 26th for individual taxes, 28th for corporate tax, and 35th for both consumption and property taxes.
• The most significant change since last year is in the corporate tax category: the UK has fallen 17 places, largely as a result of raising the headline corporation tax rate from 19% to 25%.
• Looking ahead, things will get even worse if the temporary ‘full expensing’ policy for investment in plant and machinery is allowed to expire. This would drop Britain to 31st place in the corporate category, and to 33rd place overall.
• By contrast, the rumoured abolition of inheritance tax would push Britain up to 26th place in the property taxes category, and to 28th place overall.
• This briefing outlines a revenue-neutral package of reforms that would catapult the UK to 3rd place in the tax competitiveness rankings, behind only Estonia and Latvia.
• That illustrative reform package – which consists of a complete overhaul of VAT, corporation tax, and all the UK’s property taxes, as well as lower taxes on earnings and dividends – would be profoundly pro-growth.
• While a ‘big bang’ reform of this nature is not politically possible now, the CPS urges politicians to move in such a direction by reforming and rebalancing the tax system over time.

In the latest edition of the International Tax Competitiveness Index, published on this week by the US-based Tax Foundation, the UK came in 30th of 38 OECD countries, down three places from 2022, largely as a result of raising the headline corporation tax rate from 19% to 25%.

The Index is an annual ranking of 38 OECD countries based on how pro-growth their tax systems are, examining more than 40 different tax policy variables to assess how supportive each country’s tax system is of economic growth.

The UK falls well short of Canada and Germany (at 15th and 18th place respectively) and somewhat behind the United States and Japan (21st and 24th respectively), but still ahead of France and Italy, which finish 36th and 37th out of 38 OECD countries.

The Tax Foundation has also simulated the impact of various proposed tax changes for the Centre for Policy Studies, finding that allowing ‘full expensing’ to expire as scheduled would push Britain further down the rankings (to 33rd place overall), leaving us even less internationally competitive.

On the other hand, if the government abolished inheritance tax – a commitment it is rumoured to be considering ahead of the next general election – the UK’s competitiveness rank would rise to 28th.

To accompany the publication of the Index, the Centre for Policy Studies has published a briefing note by Tom Clougherty, its Research Director and Head of Tax, illustrating a package of potential reforms which would catapult the UK to 3rd in the index, behind only Estonia and Latvia. This would raise the same amount of revenue as the current system, but in a far more pro-growth fashion.

Proposals include:

• Abolishing stamp duties and inheritance tax altogether, and getting rid of council tax, business rates, and corporation tax in their current form.
• Residential property would instead be subject to a new ‘proportional property tax’ – a low, flat-rate tax on up-to-date property values.
• Business property would be subject to a new ‘commercial landowner levy’, paid by property owners on the unimproved (land) value of sites.
• Corporation tax would be replaced with a ‘distributed profits tax’ like those in Estonia and Latvia. The 25% tax would only apply to money paid out to shareholders – effectively creating ‘full expensing’ for all business investment.
• Income tax would be restructured, with the personal allowance (and the National Insurance threshold) rising to £15,000 per year. Withdrawal of the personal allowance for higher earners would be eliminated, but the threshold for the additional (45p) rate would fall to £100,000.
• Capital gains tax would be reformed and dividend tax rates would be cut (with the highest rate falling to 29%).
• VAT would be radically simplified, with zero and reduced rates eliminated, and a much broader range of consumption taxed at the standard rate. The registration threshold would be halved.

The note acknowledges that political realities mean a ‘big bang’-style implementation of all these recommendations is not a realistic possibility – especially in the case of VAT, which would have an unwelcome inflationary impact in the short term. Nevertheless, it urges politicians and policymakers need to set a clear direction of travel and commit to incremental reform and rebalancing of the UK tax system in this direction – as part of a broader agenda to deliver much needed economic growth.

Tom Clougherty - Friday, 20th October, 2023