Centre for Policy Studies: UK to fall sharply on tax competitiveness

• The US-based Tax Foundation think tank this week published its annual International Tax Competitiveness Index, which showed the UK coming in 26th out of 38 OECD countries
• However, with corporation tax rising to 25% in April and Rishi Sunak’s super-deduction set to expire without replacement, calculations by the Tax Foundation for the Centre for Policy Studies show that the UK will be left as one of the least competitive nations on tax, coming in 33rd of 38 overall and ranking very low on business taxes (33rd), consumption taxes (34th) and personal taxes (34th)
• This would put us ahead of France and Italy among G7 countries, but well behind Germany, Canada, Japan and the United States
• Restoring the confidence of the markets has to be the Government’s absolute priority. But in the longer term ministers must think hard about how to make the design of our tax system more growth-friendly

In the latest edition of the International Tax Competitiveness Index, published on Tuesday by the US-based Tax Foundation, the UK came in 26th of 38 OECD countries – already an uncomfortably low position.

But a new briefing note by Tom Clougherty, Research Director and Head of Tax at the Centre for Policy Studies, uses fresh Tax Foundation calculations to show that the UK will fall to 33rd of 38 in the overall rankings thanks to increases to corporation tax and the expiration of the super-deduction. This includes a fall of 23 places in the competitiveness of our corporate tax regime. However, we retain the most attractive set of cross-border tax rules in the OECD.

The Tax Competitiveness index is based on 41 different tax policy variables, spread across five categories: corporate tax, individual taxes, consumption taxes, property taxes, and cross-border tax rules.

In part, the fall in the UK’s position is driven by the difficult but necessary decisions made by Jeremy Hunt to bring the public finances into balance. But Britain’s low placing on the Index is not just about the level of taxation, but how growth-friendly the tax system is. Thirteen of the 25 countries that rank above the UK in the published Index collect more in tax, including Sweden in 12th.

The note argues that under current circumstances, the Chancellor is absolutely right to prioritise restoring market confidence in the UK, through the curbing of borrowing and the imposition of strict fiscal discipline. But it urges him in the longer term to do whatever he can to promote longer-term growth and make the UK more competitive – in particular by reviving Rishi Sunak’s plans for improved capital investment allowances, which previous CPS/Tax Foundation modelling found could have a significant impact on growth, wages and employment.

Tom Clougherty, Research Director and Head of Tax at the Centre for Policy Studies, said:

“The new chancellor is right to prioritise dealing with the current crisis. But looking to the longer term, it is clear that our tax system will be a big hindrance – not a help – to our economic growth prospects.

“Once market conditions have stabilised, the Treasury should start thinking about a carefully-designed package of tax reforms that would boost our competitiveness without threatening our fiscal sustainability. Reviving Rishi Sunak’s plan to overhaul capital allowances is the best place to start.”

Notes to Editors

• ‘The UK’s International Tax Competitiveness 2022 Update’, by Tom Clougherty can be downloaded here
• The report was informed by data provided by the Tax Foundation
• The CPS and Tax Foundation’s recent modelling on investment allowances can be found here