Why tax rises can be counterproductive for public finances

According to reports in both the Sunday Telegraph and Sunday Times, the Government, in a move led by Chancellor Rishi Sunak, is planning to introduce a range of new tax increases to help pay for the spending incurred by the Coronavirus and the subsequent response.

Among the levies in line for change are capital gains tax, inheritance tax and pension tax relief. Corporation tax, too, may increase from its current level of 19% to 24%.

There has been concern from business leaders and groups that these increases may, in fact, be detrimental to economic growth and recovery. One such group – the British Chamber of Commerce – said that raising tax to balance public finances would hamper recovery.

The huge amount of money spent during the pandemic has become a problem for this Government, one that needs addressing, but we cannot afford to look at public finances with a short-term view. Creating an eco-system for businesses to thrive, grow and hire more workers is a sure-fire way to increase tax receipts in the long run and, while immediate tax increases give an immediate result, it is often lower taxation that sees long-term success.

For example, when the EIS income tax relief was extended from 20% to 30% in 2011, the amount invested in small companies through the scheme saw a tremendous jump. This is the kind of change that should be considered. Encouraging private investors to take a risk on a company with the potential to grow and aid economic recovery.

The SME economy is one of the most important and exciting assets the UK has. SMEs make up 99% of businesses in the private sector and employ over 16 million people. As well as this, it was an area creating jobs rapidly before lockdown measures came into effect. Through support from investors, small firms can return to hiring and this will be key to helping the UK economy recover.

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