Coalition deficit reduction has made UK tax base more regressive

The coalition's deficit reduction plan has increased the overall tax burden on the poor, says new study.

The coalition’s deficit reduction plan has increased the overall tax burden on the poor, says new study

The tax system in Britain has become increasingly regressive since the financial crisis as a result of the coalition’s aggressive deficit reduction plan, according to a new study.

Research by the University of Sheffield Political Economy Research Institute (SPERI) found that progressive taxes such as income tax and capital gains tax now contribute 54 per cent of total tax receipts, down from 58 per cent five years ago. Meanwhile regressive taxes such as VAT contribute 28 per cent of total tax receipts, up from 25 per cent.

The research found that VAT had taken an increasingly prominent role in tax raising in recent years, increasing from £81 billion (accounting for 16 per cent of tax revenue) to £101 billion (18 per cent of tax revenue). VAT is generally considered a regressive tax as the poorest households tend to have the highest VAT burden.

In contrast, since the coalition came to power in 2010 it has sought to reduce business taxes such as corporation tax. Business taxation now contributes 12 per cent of total tax receipts, down from 14 per cent five years ago.

Business tax revenue is also likely to fall further, according to the independent Office for Budget Responsibility (OBR), with receipts predicted to drop to 11 per cent of the total by 2017/18.

However the OBR also predicted that the trend away from progressive taxation may reverse in the coming years – but only if the economic recovery proves sustainable.

University of Sheffield research fellow Dr Craig Berry, who co-authored the report, said that the UK’s tax base had been “transformed by the economic downturn”:

“It is clear that the UK tax base has become more regressive...The trend away from progressive taxes may reverse in the next few years – if the economic recovery proves sustainable, which is far from certain. Yet the tax base will not revert in full to its pre-crisis balance, and the prediction that it will is based on earnings growth forecasts which are highly debateable.

“We know that the coalition government has sought to achieve deficit reduction primarily through spending cuts, which hit the poorest hardest. But it is clear the portion of deficit reduction enabled by tax increases also has an increasingly regressive character.”

You can read the report in full here.

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