Five bad taxes that must be axed now

‘Getting rid of the 45pc rate would send a strong pro-growth message’

Iknow, I know: the Government has no money, and continues to spend more than it raises. But many of the taxes it levies are wrong or counter-productive; they depress or distort economic activity and mean that the economy isn’t as large as it could be. Cutting taxes thus does not always mean reducing government revenues: in some cases, tax receipts can actually go up. It’s all about the size of the cake: if you grow it enough, even a smaller slice can be more nourishing.

So here, as a thought experiment, are the first five taxes that need to be abolished – when they are gone, I’m sure I will be able to find another five that need to be chopped. Needless to say, eliminating a whole range of taxes in this way is not exactly on the Government’s agenda: the rise of Jeremy Corbyn may well make the Tories even less likely to want to be radical. But my five ideas are focused on what is right, not what is necessarily immediately practical.

First, stamp duty on shares: this transaction tax is just indefensible. Its incidence falls largely on investors, depressing their returns; it also adds to the cost of capital by making it more expensive for listed companies (and private ones seeking to go to market) to raise funds. This levy does raise money – but its short-term gains to the Treasury are far outweighed by the economic costs, and the additional activity generated by its abolition would help fill the Government’s coffers in other ways. All financial transaction taxes are always a bad ideas.

Second, air passenger duty (APD): travellers from Britain are among the highest taxed in the world. The environmental justification is bogus. The system has been tweaked by the Tories but remains indefensible. APD is a clear-cut case of an overly repressive tax costing more to the Exchequer than it brings in. A study from PwC suggests that scrapping APD would bolster tourism, trade (which in the case of the UK is hugely reliant on air traffic) and foreign direct investment. In turn, this would boost GDP, add 61,000 jobs by the end of this decade and bolster revenues by a total of £2bn during the same period.

Third and fourth, the supplementary charge on the profits of oil and gas firms working in the North Sea, and the petroleum revenue tax, which hits older fields. Adam Memon of the Centre for Policy Studies is right to be calling for the immediate abolition of both taxes. The official statistics are grim: in 1998, Britain’s oil and gas output reached 230m tonnes of oil equivalent; in 2014, this was just 76m.

One consequence of this catastrophic shrinkage is that the Scottish National party’s stated plan to rely on North Sea revenues to keep the welfare state going in an independent Scotland are deluded – but it also means that the Government must stop using the tax system to discourage what is left of this industry.

Offshore corporation tax receipts have collapsed from £9.8bn in 2008/09 to £2.1bn in 2014/15, the Centre for Policy Studies reminds us, and is set to fall further to £600m and below shortly. Many fields still face horrendously high marginal tax rates, yet yield less and less for the Treasury. The supplementary charge and the petroleum revenue tax should both be axed. This wouldn’t be enough to turn back the clock but it would help engineer at least a minor renaissance for the sector. As a result, it is possible that the industry would, on balance, yield more cash for George Osborne.

Fifth, the top rate of income tax must be eliminated and we should return to the 40p maximum introduced by Lord Lawson in 1988. Economists will disagree endlessly, of course, but my interpretation of the theory and empirical evidence is that its yield is at best trivial and at worst highly negative. It is certainly reducing Britain’s tax base. Getting rid of the 45pc rate would send a strong pro-growth message and confirm that the UK still wants to encourage wealth-creation and investment.

These sorts of supply-side reforms should go hand in hand with additional measures that are explicitly aimed at helping the working poor. Is such an agenda politically impossible? Probably. But axing these five taxes would be a great first step towards rebuilding Britain’s competitiveness.