Commission hints at tax reforms to revive ‘stagnation nation’

This inquiry is a collaboration between the Resolution Foundation and the Centre for Economic Performance (CEP) at the London School of Economics (LSE) and funded by the Nuffield Foundation. Led by a Commission of leading ‘thinkers and doers’, its subject matter is the nature, scale, cumulative impact and policy context for this economic change. This includes Dani Rodrik, Ford Foundation Professor of International Political Economy at Harvard University, Frances O’Grady, General Secretary of the British Trades Union Congress and Dame Carolyn Fairbairn, Former Director-General of the Confederation of British Industry.

The interim report says the UK economy is defined by the low growth of the past 15 years and the high inequality of the past four decades. This makes the UK a ‘stagnation nation’. The report says that relying on supposed silver linings or silver bullets is part of a wider problem: the belief that a policy shift in one area holds the answer to stagnation. It won’t, say the Commission; instead the task for the 2020s is to renew the UK’s economic strategy.

A central message is that stagnation leaves public services struggling, even as the tax burden rises. The report says the 2020s must be a high-investment decade. The Chancellor is rightly examining what more the tax system can do, but there are limits to the role of traditional tax incentives, which struggle to cover most intangible investment, in an economy like the UK.

Powers to raise more taxes locally inevitably give more fiscal flexibility to richer areas. But other, less centralised, countries manage this trade off, and the UK must too, says the report.

The elevated level of taxes has not prompted sufficient focus on good taxes, says the report. Both main parties’ focus on raising National Insurance has asked more of younger workers at a time of flatlining wages, but nothing of landlords or most pensioners. A strategy for the 2020s will need to consider new approaches, recognising that wealth has risen from three to almost eight times national income since the 1980s, while wealth taxes have not risen at all as a share of GDP.

Fairer, and more efficient, approaches will need to be explored for tax in the years ahead, says the report. Our tax system currently hugely benefits those (largely richer and older) who do not rely solely on wages for their income and who often have choices over which form to take it in. Not only do many of them incur a lower tax rate than is charged on earnings (for example, capital gains are taxed at lower rates than other income), but those with multiple sources of income (from the likes of dividends, capital gains, rent, or savings) can exploit separate tax allowances to pay far lower tax than an employee with the same income.

The report also says those on lower incomes must be protected from the costs of net zero and a benefits system that leaves many exposed to hardship.

The report came up at Women and Equalities questions in Parliament last Wednesday, with Labour Party Chair Anneliese Dodds saying it “shows that our economy is over a decade into a period of stagnation after 12 years of Tory rule, yet all we see from the Government Benches is a chaotic Tory tombola of tax cuts”. Exchequer Secretary Alan Mak said: “The Resolution Foundation has actually praised this Government’s handling of the cost-of-living pressures. The cost-of-living support package, totalling £37 billion this year, is in line with our international competitors and more generous than France, Germany and Japan.”

The report is here.