Tax switch could boost economic growth, says Professor Christopher Heady

Switching some of the tax burden from personal and corporate income towards housing and consumption could boost economic recovery and growth. That’s one of the main findings of a new study co-authored by the School’s Professor Christopher Heady.

Working with a team of researchers from the Organisation for Economic Co-operation and Development (OECD), Professor Heady found that taxes on consumption, such as VAT, and taxes on the ownership or occupation of houses, such as Council Tax in the UK, are the best way to stimulate longer-term economic growth.

Coupled with income tax cuts, a shift of just one per cent of tax revenues in this direction could increase economic output by between 0.25-1 per cent, the research team found. Their findings are published in this month’s issue of The Economic Journal.

‘When the economy is in recession, the best taxes to cut early are on income taxes for people on low incomes,’ said Professor Heady.

‘When, as now, the economy is in recovery and the budget deficit needs to be reduced, the best taxes to increase are taxes on consumption and on the ownership or occupation of houses.

‘Although taxes on housing are unpopular and could produce only modest increases in revenue, they should be considered because the current arrangements can encourage people to buy houses that are larger than they really need, diverting investment from more productive uses.

‘However, taxes on the sale of housing, such as Stamp Duty Land Tax in the UK, should not be increased because they discourage the reallocation of housing to its most productive use and make it expensive for people to move to better jobs. These taxes could even be reduced if sufficient additional revenues were raised from other taxes on housing,’ added Professor Heady, who is a former OECD head of tax policy and statistics.