Think tank urges Rishi Sunak to slash and simplify taxes

by

Rishi Sunak must CUT and simplify taxes to revive the economy after hammer blow from coronavirus lockdown, warn economists

  • Institute of Economic Affairs report calls on Rishi Sunak to reform tax system
  • It suggests Chancellor can learn the lessons from recent history to boost growth
  • Report calls for income tax to be capped at 40 per cent and VAT at 17.5 per cent 

By Jack Maidment, Deputy Political Editor For Mailonline

Published: | Updated:

Chancellor Rishi Sunak has been urged to slash and simplify taxes in order to stimulate the UK economy and boost the nation’s recovery from the coronavirus crisis.

A new report and open letter sent to the Chancellor by the Institute of Economic Affairs think tank (IEA) suggests Mr Sunak should learn the lessons from recent history to get Britain back on its feet. 

The report points to the policies which were in place during the period between 1993 and 2003 – a decade of high productivity growth and national income growth – and urges Mr Sunak to adopt them now. 

Key policies include capping the top rate of income tax at 40 per cent, reducing VAT to 17.5 per cent and putting a ceiling on stamp duty at four per cent. 

The Institute of Economic Affairs think tank is urging Chancellor Rishi Sunak to slash and simplify taxes in order to boost the UK’s recovery from the coronavirus crisis

Government coffers were bolstered between 1993 and 2003 as real public sector revenue grew by an average of 4.3 per cent per year - this meant government income increased by 51 per cent in just 10 years

Government coffers were bolstered between 1993 and 2003 as real public sector revenue grew by an average of 4.3 per cent per year – this meant government income increased by 51 per cent in just 10 years

Government revenue was also running above expenditure for a brief period at the end of the 1990s meaning Whitehall was running at a surplus

Government revenue was also running above expenditure for a brief period at the end of the 1990s meaning Whitehall was running at a surplus

What tax policies were in place in 1993 and what was the impact on the UK economy?

In 1993/94 the income tax system was divided into three rates as it is now but the rates were different.

The lower rate was set at 20 per cent, the basic rate at 25 per cent and the higher rate at 40 per cent.

The basic rate was then reduced in the following years to 24 per cent, 23 per cent and then 22 per cent where it stayed until the tax system was overhauled in 2008/09 when the basic rate was set at 20 per cent and the higher rate stayed at 40 per cent. 

An additional rate was then introduced in 2010/11, bringing in a 50 per cent top rate of tax which was reduced to 45 per cent in 2013/14.

The VAT rate was also lower in 1993 at 17.5 per cent. It stayed there until 2009/10 when it went down to 15 per cent for one year before then rising to 17.5 per cent and then 20 per cent where it is now.

Economic markers from the 1993/2003 period suggest the UK economy was in good health.

UK public sector debt as a percentage of GDP hovered between 30 and 40 per cent. It is now above 100 per cent.

Government revenue was also running above expenditure for a brief period at the end of the 1990s meaning Whitehall was running at a surplus.

Government coffers were bolstered over the decade as real public sector revenue grew by an average of 4.3 per cent per year – this meant government income increased by 51 per cent in just 10 years.

The IEA open letter, signed by 30 economists, academics, business people and politicians, comes less than two weeks after Mr Sunak unveiled his Winter Economy Plan.  

The IEA report, ‘The Chancellor’s Post-Pandemic Choices’, which accompanies the letter highlights the policies that were in place during recent boom periods in the UK. 

It argues that Mr Sunak’s rescue plan for the British economy should mimic some of the measures which were in place in the mid to late 1990s and early 2000s. 

The report states that policies like lower rates of income tax have a ‘proven track record’.      

However, it calls on Mr Sunak to go further than his predecessors in Number 11 as it argues that even in boom periods the UK tax system has been ‘too complex, too distortionary, and not sufficiently investment-friendly’. 

‘We need major tax simplification, and a shift in the burden of taxation from more distortionary to less distortionary taxes,’ it says. 

In the open letter to Mr Sunak, the IEA said: ‘Governments have choices. This Government may not choose to adopt some or any of these successful policies. 

‘At the very least, however, this evidence should weigh heavily on any decision-making.’  

Neil Record, chairman of the IEA and author of the report, said Mr Sunak should ‘recreate that success’ from recent history in order to repair the ‘terrible damage wrought on the economy’ by coronavirus.

‘Economists have had a poor recent track record of forecasting,’ he said.

‘So rather than building yet another model of the economy to help guide advice to the Chancellor, I have looked back at periods of UK economic success and growth within the past 40 years. 

‘I have identified the best decades within that period, and analysed the taxation, fiscal and regulatory policies that helped create those successful periods. 

‘If decisions made now can recreate that success, then despite the terrible damage wrought on the economy by Covid-19, the future can be bright.’