Chancellor Rachel Reeves’s upcoming Budget risks pushing the UK towards having one of the least competitive tax systems in the developed world, according to a major new analysis by the US-based Tax Foundation and the UK’s Centre for Policy Studies (CPS).
The report warns that if Labour introduces a widely expected capital gains tax increase, the UK could plummet further down the Organisation for Economic Co-operation and Development (OECD) tax competitiveness rankings.
The UK has already dropped to 30th place out of 38 OECD countries in the Tax Foundation’s 2024 International Tax Competitiveness Index, as a result of the previous government’s measures. However, the study suggests that further tax hikes under Ms Reeves could see Britain fall another four to five places, leaving it just ahead of France, Italy, and Colombia in the overall rankings.
Daniel Herring, a researcher at the CPS, warned: “There’s a real danger that Britain could end up with one of the least competitive and most anti-growth tax systems in the OECD if the expected tax rises come to fruition in the Budget. If Labour truly wants long-term economic growth, it needs to consider fundamental tax reform, rather than just increasing taxes.”
Concerns over capital gains and dividend tax hikes
The analysis focuses particularly on potential increases in capital gains tax and dividend tax. The CPS modelled the impact of these measures, showing that raising capital gains tax could drop the UK’s ranking to between 32nd and 34th. Similarly, raising the higher rate of dividend tax to 45%, to align with income tax, would drop the UK two places to 32nd. If both changes are combined with a mooted wealth tax, the UK could fall to 35th place, fourth from the bottom of the OECD rankings.
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