Public spending
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Economy and public finances
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Tax

The shifting shape of UK tax

Charting the changing size and shape of the UK tax system

Adam Corlett
Adam Corlett

Ahead of the general election, this report takes a broad look at the UK tax system. Should today’s taxes be considered high? How have they changed over time? What challenges face the tax system? And what do the parties propose to change? It is part of a trio, following ‘The shape of things to come’ – about public spending – with a further paper on the state of the welfare system to follow.

Taxes have risen as a share of GDP, particularly when compared to the 1990s, though they remain low by international standards. We explore some of the reasons for this rise, including straightforward tax increases but also changes in the make-up of the economy. And we look at how taxes have changed for households and employees, where the picture is instead one of declining tax rates.

We look at what the party manifestos are likely to contain, such as top tax rate increases by Labour and a National Insurance cut from the Conservatives, and explore the potential impacts of these changes. These and other policies mean there is likely to be a real divergence of options on offer at the election. But every party will need to also be straight about some of the structural challenges facing the UK’s tax system, which will need tackling in the 2020s.

Key findings

  • Total revenue as a share of GDP has risen to its highest level since 1985-86 but remains very close to its post-war average
  • This is partly explained by changes in the make-up – and distribution – of the economy, such as falling business investment and a rising labour share
  • For the typical employee, the effective tax rate on earnings has fallen from 30 per cent in 1975 to 18 per cent in 2019
  • Taxes may need to rise by perhaps 1 per cent of GDP every five years simply to fund health and old-age social security
  • The gap between Labour’s proposed package of tax rises and potential Conservative cuts may be as large as £60 billion a year
  • Labour and Liberal Democrat income tax plans would most affect richer households
  • A National Insurance cut by the Conservatives could reduce most employees’ taxes by around £480 a year, though workers on Universal Credit would see £300 of that clawed back through reduced benefits

Recommendations

  • To ensure that any National Insurance threshold increase benefits workers on Universal Credit as much as those in richer households, the Conservatives must increase work allowances £1-for-£1 with any tax cut.
  • To minimise avoidance opportunities and maximise the revenue from top income tax rises, Labour should implement them swiftly and with accompanying broad measures such as capital gains tax changes.
  • Given the need for revenue, further cutting the corporation tax rate from 19 per cent to 17 per cent in April 2020 is an extravagance that should be cancelled.
  • The UK’s wealth taxes are poorly designed and have not kept up with growing household wealth, and reforming them should be considered as a fair way of funding a growing and greying state.
  • Every party should consider how it will use the tax system to reduce greenhouse gas emissions but also how it will ultimately replace that revenue, with £35 billion a year of vehicle taxes at risk.

Further reading

More, more, more
Putting the Autumn Budget 2024 decisions on tax, spending and borrowing into context
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Camron Aref-Adib, Mike Brewer, Molly Broome, Tom Clark, Alex Clegg, Nye Cominetti, Adam Corlett, Emily Fry, Sophie Hale, Lindsay Judge, Zachary Leather, Jonathan Marshall, Charlie McCurdy, Louise Murphy, Felicia Odamtten, Cara Pacitti, Simon Pittaway, Hannah Slaughter, James Smith, Greg Thwaites, Lalitha Try
Great expectations in hard times?
Previewing the big decisions for the Chancellor in the new Government’s first Budget
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Emily Fry, Cara Pacitti, James Smith
Revenue and reform
What tax changes could – and should – we see in Autumn Budget 2024?
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Adam Corlett
Adam Corlett
Adam Corlett Principal Economist