How Would You Reform the UK Tax System if You Wished to Increase the Level of Economic Efficiency?

Introduction

Economic efficiency is the main issue affecting the United Kingdom currently. The country's real disposable income per capita has shown minimal growth over the previous ten years. However, the country's gross domestic product per every worker has been noted to develop less quickly as compared to other organizations in the economic cooperation and development countries (Leicester, 2006). The main factor that tends to influence economic growth or efficiency is productivity growth. Productivity growth indicates that the Canadian population can utilize fewer resources and work less to produce the same amount of output. It is essential to ensure that the tax system does not hinder economic efficiency.

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The taxes tend to hinder productivity through various ways that include; first, they may change the economic decisions leading to countries business failing to make the best use of the resources in the economy. Secondly, taxes may discourage people from gaining the skills required in the current workforce thus minimizing the overall economic productivity. Thirdly, the taxes may also hinder innovation in the economy through discouraging the population and the businesses to create and market thus resulting in increased income for the workers. In the current global economy, the taxes that are not in line with other countries that offer similar public infrastructure may discourage business investments. The United Kingdom tax, expenditure, and regulatory policies help to assess how much economic growth can be achieved in the continually competitive arena (James 2012). Therefore, Canada has the opportunity to impose various reforms in the tax system to stimulate or trigger economic growth. This study aims to investigate how the United Kingdom tax system would be reformed to enhance the country's economic efficiency.

Business tax reforms

The improvement of the United Kingdom economic efficiency is likely to be triggered by creating reforms in business taxation. According to various studies, most of the distortionary revenue sources tend to originate from business taxes mainly the corporate income tax. The effective tax rates on capital tend to change depending on the industry, size of the company and the business organization. An ideal business tax system would be considered neutral depending on the asset types and the level of risk involved. While any non-neutralities in the tax system should be considered to be related to the mitigation or handling the effects of the market imperfections (Arnold, 2008). For instance, the corrective non-neutralities in the country's tax system include the fair treatment of the small business and creating incentives for various research and developments (Browne 2012). Therefore, not only should the country's business taxes be neutral, but they should also be taxed using the rates that are competitive internationally.

This is particularly important for the corporate income tax, Depending on the ease at which corporations tend to shift their income from the high to low taxed countries. A country that has a high corporate income tax rate may tend to find its tax base eroded significantly. According to research, in case of an increase in the corporate income tax rates the revenue gain tend to range between 8 to 20% less than what would have been gained if there were no alterations in the tax rates (Rosen, 2004). According to a report by a technical committee on business taxation, it was recommended that the United Kingdom should embrace a neutral business tax system with reduced and a bit more competitive business tax rates. Also, a reduction in the amount of marginal effective tax rates and also a reduction in tax variance tend to be high priorities from the standpoint of efficiency and growth.

Environmental taxation

In environmental taxation, the structure of the current energy and transport taxes can be enhanced to attain their environmental ends more effectively and increase the national income. Congestion in the form of the time lost in traffic jam tends to impose an obvious cost on the United Kingdom economy. Motoring tends to be discouraged by the fuel duties while the traffic congestion on any specific journey tends to bear little relation to the quantity of fuel burned. Congestion depends mainly on when and where the journey occurred, while the determinants of the amount of fuel consumption tend to be irrelevant when viewed from the congestion point of view. An improvement in the tax system, in this case, would be to relate motoring taxes closely to the congestion that is caused driving and also to replace the fuel duty with the system of congestion charging depending on the place and time.

The other area where creating reforms on environmental taxation would result in an improvement in the economic performance is the establishment of a bit more consistent prices for the greenhouse gas emissions. To reduce greenhouse gas emissions means increasing the cost of burning fossil fuels and increasing the cost of production (Fankhauser, 2013). The economic cost of the reduction of the total carbon emission tends to be much lower in case the reductions occurred when they were cheapest. This would be achieved automatically if policies that were put in place taxed all carbon equally despite its origin or its use. The price increase would ensure that the polluting activity of marginal value would cease completely.

Labour supply, personal tax, and benefit system

Currently, the labor demand tends to be more of concern that labor supply with the priority or intention of reducing unemployment. This tends to have long-term implications, particularly in case those out of work see their attachment to labor market weaken. However increasing the number of workers, output depends on the amount that the workers chose to work for. The tax and benefit system tends to create financial disincentives at work; this is because taking money of the rich people and instead offering it to the poor people tends to minimize the poor people's incentives to become rich. This kind of disincentive can be minimized through offering less support to the poor or through obtaining less from the rich people. Therefore unless the tax rates start at a high rate and the population turns out to be responsive, the increased revenue will involve the trade between the average work incentives and the entire redistribution. According to research, most people tend to be more responsive to the work incentives than others. Therefore the United Kingdom government could enhance the overall labor supply without having to strengthen the incentives on average by ensuring that the most responsive groups receive the strongest incentives.

It is evident that some people tend to be more responsive to incentives than others at particular stages of their life cycle. Therefore taking advantage of this situation, can lead to creating reforms that are neither regressive nor progressive overall spread across the life cycle. This would lead to an increase in employment rates and an increase in the national income. There are two illustrative reforms of this kind shown by the merles review this include. First, the work incentives may be strengthened mainly among the families whose youngest child is of school age, thus reflecting the finding that the parents of the older children tend to be more responsive to the incentives present in the tax and benefit system than the parents of the younger children (Mirrlees & Adam 2010). Secondly, the work incentives could be strengthened for those in their late working life stages, that is the age between 55 to 70 years (Meade, 2013). This group is highly responsive to incentives.

Conclusion

The United Kingdom government should ensure that they put in place various measures to improve the countries tax system ensure or promote the country's economic efficiency. Some of the measures or reforms that should be done on the countries tax system include first, the introduction of the business taxes reforms. This is considered important since most of the distortionary revenue sources tend to originate from the business taxes mainly the corporate income tax. Secondly, environmental taxation, in environmental taxation the structure of the current energy and transport taxes can be enhanced to attain their environmental ends more effectively and increase the national income. Thirdly, labor supply, personal tax, and benefits system this is because the current, the labor demand tends to be more of concern that labor supply with the priority or intention of reducing unemployment. The tax and benefit system also tends to create financial disincentives at work

References

Arnold, J., 2008. Do Tax Structures Affect Aggregate Economic Growth?.

Browne, J. and Roantree, B., 2012. A survey of the UK tax system. Institute for Fiscal Studies.

James, S., 2012. UK tax system. In A Dictionary of Taxation, Second Edition. Edward Elgar Publishing Limited.

Leicester, A., 2006. The UK tax system and the environment (No. R68). IFS Reports, Institute for Fiscal Studies.

Mirrlees, J.A. and Adam, S., 2010. Dimensions of tax design: the Mirrlees review. Oxford University Press.

Meade, J.E., 2013. The Structure and Reform of Direct Taxation (Routledge Revivals). Routledge.

Fankhauser, S., 2013. Valuing climate change: the economics of the greenhouse. Routledge.

Rosen, H.S., 2004. Public finance. The encyclopedia of public choice (pp. 252-262). Springer, Boston, MA.