Research review: Taxation, Government Spending and Economic Growth from the Institute of Economic Affairs


By Joanne Pitt, Principal Policy Advisor, Local Government, CIPFA

This is a very substantial piece of work from David Smith and other authors that sets out to consider not just a reform of the current tax system but a complete redesign. It makes the changes currently taking place within business rates seem rather small scale by comparison. This vision for a reformed tax system includes: 

  • the historical context
  • government spending patterns and austerity
  • the relationship between tax and growth
  • the design of a new tax system.

Although the research is structured to encompass a far broader range of taxes than those associated with local government, it is interesting to see the criticisms made of business rates and council tax. Both of which the author suggest should be abolished. At the back of the document there is an interesting table called Tax Death Row which identifies the 20 taxes recommended for termination. 

Along with council tax and business rates are a number of taxes that the author suggests should be replaced by a location value tax. The location value tax is explained in detail over four pages of the research paper, but to summarise (pg 198):

“A location value tax involves a tax on the value of land in a given location which is normally calculated on the assumption of the land being in its most valuable permitted use.”

The author deal effectively with objections as they arise and concludes that “a detailed feasibility study ought to be commissioned, but there does not seem to be any fundamental reason why a location value tax could not be implemented by extending the process used by the Valuation Office Agency for business rates."

The important question for local government would be does it raise more money and would that be kept locally. In response to this the research does suggest that this location value tax could be levied locally and links this back to the idea that where revenue is raised locally local government is often more efficient. 

The report explores the idea of money raised and identifies a figure of 4.6% of national income which it compares with the 3.6% raised currently by council tax, business rates and stamp duty land tax combined.

Overall the report is interesting, readable and thought provoking and draws well on other literature especially for those with an interest in government finance. It is also insightful to see the way taxes link with economic growth, working to stimulate activity through tax change. 

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The full report can be found at the Institute for Economic Affairs  

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