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Taxation, Government Spending and Economic Growth

Taxation, Government Spending and Economic Growth

Philip Booth | Ryan Bourne | Rory Meakin | Lucy Minford | Patrick Minford | David B. Smith


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Amidst the debates about ‘austerity’ a number of vital debates in public finance have been sidelined. Because the reductions in government spending – small though they have been so far- have been designed to reduce the government’s borrowing requirement, there has been little discussion of whether the size of the state should be reduced in order to facilitate long-run reductions in the burden of taxation. This book traces the history of the growth of the size of the state over the last 100 years whilst also making international comparisons. There is a particular focus on recent and projected future developments which shows that, though the total level of government spending has not decreased significantly in recent years, there has been a big redirection of spending from some areas to others. The authors then examine the evidence on the relationship between taxation and economic growth. As well as reviewing recent literature, they also undertake new modelling that higher taxes are detrimental for growth. In the final part of the book, the whole UK tax system is reconsidered in a proper economic framework. The UK has one of the world’s most complex tax systems and its incoherence has increased over the last five years. Sweeping reforms are proposed to the system which wold involve abolishing around 20 taxes and the development of a simple, predictable tax system based on principles that should gain wide acceptance.

Table of Contents

Section Title Page Action Price
_GoBack 27
_Ref310717193 53
The authors x
Foreword xiii
Summary xvi
Tables, figures and boxes xxiii
1\tIntroduction 1
Philip Booth 1
The growth of government spending 1
Government spending, taxation and growth 3
Recent trends in types of government spending 8
Regional differences 9
But what about austerity? 10
Why does taxation affect economic growth? 11
Tax and growth: the evidence 14
Designing an effective tax system 19
Conclusion 22
References 23
Part 1 25
The growth of government 1870–2020 25
2\tHow should government spending and tax burdens be measured? 27
David B. Smith 27
Introduction 27
It is government spending and not taxation that determines the burden of government activity 28
No institution can tax itself 32
How do we define the public sector? 35
How do we define national output? 37
The national accounts revolution: ESA 2010 41
Is there a best buy? 45
3\tHistorical trends in the government spending and tax ratios 48
David B. Smith 48
The international experience 48
The British experience 1870–2015 55
Regional breakdown of UK government spending 61
4\tAnd they call it austerity 66
Ryan Bourne 66
Introduction 66
Government spending under the coalition 68
Government spending under the Conservative government 76
The reckoning up: government spending 2010/11 to 2019/20 80
Annex to Chapter 4 84
David B. Smith 84
A misleading political myth in the austerity debate 84
5\tSpending, tax and economic welfare 87
David B. Smith 87
Government expenditure by function 87
Divergent consequences of the different forms of government spending 89
Economic growth and the financing of government spending 92
The size of government: maximising growth and welfare 94
Conclusions 97
References 99
Part 2 103
Taxation and Growth: The Empirical Evidence 103
6\tTax and growth: theories and evidence 105
Patrick Minford 105
Introduction 105
The association between tax and growth: growth regressions 108
Modelling growth, taxation and investment incentives 116
Tax and growth modelling: a new approach 118
7\tTax, regulation and growth: understanding the research 122
Lucy Minford 122
The effect of tax on growth: further analysis of the growth regression approach 122
The effect of tax on growth: further considerations 126
Entrepreneurship and growth 128
Labour market regulation and growth 136
Conclusion 141
8\tTax, regulation, incentives and growth: new modelling for the UK 142
Lucy Minford 142
A model with productivity driven by policy 143
The policy variables driving productivity 147
Data for the policy variable 149
Tests of the model 154
Results: the impact of regulation and tax on growth 155
Conclusion 157
References 159
Part 3 167
Designing a new tax system 167
9\tThe principles of a ‘good’ tax system 169
Rory Meakin 169
Classical maxims of taxation 169
Bringing Adam Smith up to date 170
Practical impediments to achieving the best tax systems 173
Proposals for a redesign of the tax system 175
Tax design rules 180
Tax design rules to disregard 183
10\tWhat should a good tax system look like? 186
Rory Meakin 186
Tax on income 186
Tax on consumption 190
Taxes on wealth 197
Corporate tax 202
Local taxation 208
The shape of a good tax system 212
11\tThe future for taxation in the UK 214
Rory Meakin 214
Distributional issues 215
Tax administration 220
References 223
About the IEA 226
Table 1\tRatios of general government expenditure, including transfers, to money GDP at market prices (%) – selected countries 2
Table 2\tUK general government expenditure in 2012/13 – regional data 10
Table 3\tGeneral government transactions by subsector and economic category in fiscal 2015/16 38
Table 4\tAlternative measures of the shares of government spending and taxes in UK national output in fiscal year 2015/16 41
Table 5\tExpenditure components of money GDP by value in 2013, as reported originally and as subsequently revised 44
Table 6\tComparison of UK government spending and tax ratios in fiscal 2013/14 using four different generations of official data 45
Table 7\tRatios of general government expenditure, including transfers, to money GDP at market prices (%) 50
Table 8\tRatios of total tax revenues to money GDP at market prices (%) 53
Table 9\tRatios of main categories of UK general government expenditure plus taxes to money GDP at factor cost (%) 58
Table 10\tUK general government expenditure in 2012/13 by country and region on a residence basis 62
Table 11\tOverall total managed expenditure plans versus outcomes 69
Table 12\tReal spending per capita (2015/16 prices), 2010/11 to 2014/15 71
Table 13\tGovernment spending 2010/11 to 2014/15 72
Table 14\tComparison of real government spending forecasts from July Budget 2015, November Autumn Statement 2015 and March Budget 2016 (2015/16 prices) 78
Table 15\tMarch 2016 Budget forecasts for UK public spending by function and government receipts in 2016/17 88
Table 16\tThe negative impact of taxation on economic growth 110
Table 17\tCorrelation coefficients for tax and regulatory components of composite index 154
Table 18\tDistributional effects data, by household income decile 218
Figure 1\tRatio of UK non-oil tax receipts to UK non-oil GDP at factor cost 1900–2015 29
Figure 2\tRatios of UK general government expenditure and private expenditure to UK GDP at factor cost 1870–2015 33
Figure 3\tRatio of UK general government expenditure to private GDP and non-oil taxes to non-oil private GDP 1900–2015 34
Figure 4\tRatios of UK general government expenditure to GDP measured at both market prices and at factor cost 1870–2015 39
Figure 5\tDifferences between factor-cost and market-price measures of the UK spending burden 1870–2015 40
Figure 6\tAggregate OECD government spending and revenues expressed as a share of GDP at market prices 1960–2015 51
Figure 7\tGap between UK and average OECD spending ratios (at market prices) 1960–2015 52
Figure 8\tRatio of UK general government current expenditure to GDP at factor cost 1870–2015 60
Figure 9\tRatio of UK general government debt interest and welfare payments to UK GDP at factor cost 1870–2015 61
Figure 10\tReal changes in government spending by function 2010/11 to 2014/15 73
Figure 11\tReal changes in DEL by government department 2010/11 to 2014/15 75
Figure 12\tReal changes in DEL by government department 2015/16 to 2019/20 80
Figure 13\tNominal and real expenditure (£ billion; real expenditure in 2015/16 prices) and spending as a proportion of GDP 81
Figure 14\tRatio of UK government ‘primary’ expenditure (i.e. excluding debt interest) to UK GDP at factor cost 1870–2015 85
Figure 15\tRatios of welfare payments and social security taxes to UK GDP at factor cost 1900–2015 91
Figure 16\tRatio of UK general government investment to UK GDP at factor cost 1946–2015 92
Figure 17\tLabour market regulation, top marginal income tax and corporation tax rates 152
Figure 18\tThe overall barriers to entrepreneurship measure 155
Figure 19\tImpact of tax changes by income decile 217
Box 1\tKey facts – government spending 2010–2020 12
Box 2\tDynamic scoring 16
Box 3\tProblems with traditional growth regressions 114
Box 4\tTax death-row 210