Jonathan Eida is a researcher at the TaxPayers’ Alliance
The UK’s economic problems are clear for all to see.
Undoubtedly, whoever takes the Conservative party forward following the leadership campaign will need to have the economy at the front and centre of their mind. Economic growth is anaemic while debt skyrockets. Government waste at all levels piles up while taxpayer’s disposable income gets pushed down.
The next Tory leader will have to find solutions to all these issues if they are to regain the trust of the British people.
A new approach to taxation is required. This does not just relate exclusively to the amount of tax but also the quality of the taxes. Badly formed taxes that are poorly implemented will depress receipts, damage growth and leave the public worse for wear. For too long, the UK has struggled under a tax system that is overly complicated and increasingly detrimental to both businesses and individuals.
The Tax Foundation’s report on international tax competitiveness lays bare the rot at the heart of the UK’s tax system.
It reveals a system that is uncompetitive, burdensome, and increasingly outdated—a millstone around the neck of the UK economy. The report underscores a simple but crucial philosophy, which should guide future tax policy: “A well-structured tax code is easy for taxpayers to comply with and can promote economic development while raising sufficient revenue for a government’s priorities.”
This is a good, simple rule for governments to live by. It’s one that Labour seems intent on trashing. The Conservatives, on the flipside, have too often been hesitant to adopt and articulate this philosophy.
The Tax Foundation’s analysis reveals that a good tax system is competitive and neutral. A competitive system attracts more capital, investment, and, ultimately, growth. Meanwhile, a neutral tax system ensures that the state does not distort economic decisions by favouring one form of income or activity over another. Neutrality allows for greater tax revenues, reduces the complexity of tax laws, and closes loopholes that allow for tax avoidance.
There was a brief window when Conservatives took this seriously.
While in opposition, George Osborne set up the UK tax commission which aimed at increasing the efficiency, transparency, simplicity and fairness of the British tax system. In power, the Conservative Party set up the Office of Tax Simplification. Very much in the same vein of the UK tax commission, the OTS was geared towards cleaning up the tax system. But it ended up being a dud. Far from tax simplification, the UK’s tax code has gone from 5,000 pages in 1995 to 10,000 in 2010 and now stands at a whopping 20,000 pages.
This just exemplifies how burnsome the UK’s tax code has become.
The proof of the disaster class that is our tax system is in the pudding. August’s GDP figures showed GDP rising by 0.2 per cent which was preceded by zero growth in both June and July. At the end of 2023, the UK was in a technical recession.
Despite this stagnation, successive governments have continued to search for quick fixes to spur investment, whether through national wealth funds proposed by Chancellor Rachel Reeves or pension fund reforms sought by the previous government.
These are surface-level solutions that fail to address the root cause of the problem: a tax system that discourages investment, distorts decision-making, and is so complex that vast amounts of time and money are spent on trying to avoid tax, rather than on genuinely productive activities.
But all these solutions obfuscate the biggest obstacle blocking investment and growth. A tax system which disincentives growth and investment, while at the same time being so complex that clever accountants can ensure that tax receipts are left unreceived.
The Labour government does not understand this, or perhaps they simply don’t care.
That is why they have failed to rule out an Employer National Insurance hike. They are scrabbling around looking for ideas to raise tax revenue and invest in Britain while simultaneously breaking the backs of businesses looking to invest and grow, meaning that the revenues they are so desperate for may never truly materialise The Treasury’s own forecast of potential tax receipts from an Employer NI doesn’t include the “substantial additional negative exchequer effects from earnings and business profits.” They’re tying themselves in knots.
Labour will not achieve the growth it claims to desire as long as the UK ranks so poorly on the Tax Foundation’s index. We are a shocking 30th out of 38 OECD countries in terms of tax competitiveness. 28th for corporation tax and 21st for individual tax. We climbed one place since 2023, largely down to the introduction of full-expensing, a genuinely positive reform that has boosted our competitiveness. But we remain lagging far behind.
The TaxPayers’ Alliance has long been a champion of the Single Income Tax proposal.
This would see taxes cut to 33 per cent of national income with marginal tax rates not exceeding 30 per cent. This would end the needless and distortionary distinction between national insurance and income tax, scrap the anti-investment capital gains tax and corporation tax, and simply treat all income – whether from salaries, dividends, rent or the sale of investments – the same, with a 30 per cent tax rate above a personal allowance.
A simple, clear and effective tax system. Tax avoidance would be negligible. The only real losers would be tax accountants.
The next Conservative leader should be looking at our tax system for a solution to our economic woes. For too long the UK economy has been in the doldrums and it won’t get better under Labour.
This presents an opportunity in five years time. The next Tory leader must be ready to seize it.
