Getting the economy moving post COVID-19 – is low taxation the answer?

Of all the uncertainties caused by the COVID-19 pandemic, it seems inevitable that at some point in the near future, taxes are going to have to rise. Tackling the crisis has led to a massive surge in UK public spending at a time when tax receipts will come under pressure from the recession.

The Chancellor Rishi Sunak faces some tough choices when tax comes back on the agenda in the spring. Increasing government borrowing could cover much of the shortfall, but the prime minister has ruled out deep cuts to public spending of the sort seen after the 2008 financial crisis. Increasing taxes would send a signal that ministers are taking strong action to bring the deficit under control and the received wisdom is that this is what is going to happen.

So it is interesting to note that the Institute of Economic Affairs (IEA) has urged the Chancellor to look to the tax policies of the 1990’s for inspiration when returning the economy to growth in the aftermath of the pandemic. The IEA says that it was a reduced corporation tax rate, a top rate of income tax limited to 40%, stamp duty of no more than 4%, VAT at 17.5% and a “light regulatory burden on all productive sectors” which helped to generate productivity growth and strong GDP during that decade.

In the view of the IEA, over the past 40 years the best decades within that period were the result of business helpful taxation, fiscal and regulatory policies. Despite the terrible damage to the economy by the public health response to COVID-19, the future can still be bright if decisions made now can recreate that success.

In similar vein, the idea of a wealth tax is becoming more talked about amid the coronavirus downturn. However the practical difficulties of assessing precisely which elements of wealth would be subject to such a levy together with the relatively low revenues generated might make the Chancellor pause. Recent movement in other countries which have tried to raise revenue this way is trending away from such taxes. Previous chancellors who considered it seriously found that the projected yield was never enough to meet the administrative and political cost.