Discuss methods the UK government could use to increase tax revenue

Edexcel A-Level Economics Paper 2 June 2022 Extract

With reference to Extract C and your own knowledge, discuss methods the UK government could use to increase tax revenue. (12 marks)

One method to increase tax revenue would be to raise corporation tax which has been announced to rise to 25% from in 2023 from the current rate of 19%. This tax would increase tax revenue on business profits, as corporation tax is a tax on business profits and would be successful as it is still the lowest rate of corporation tax in the G7 but will also raise £17.2 bn in 2025-26, which would be essential tax revenue in order to reduce budget deficit and address the extremely high 46% UK debt-GDP ratio.

However, this disincentivises more businesses from setting up in the UK. Additionally, it reduces the ability for businesses to reinvest in capital, which would lead to a fall in productivity in the UK. Overall, this would lead to a decrease in productive potential in the economy, which would lead to a fall in the potential or trend rate of economic growth, therefore making it more likely that the economy enters a positive output gap and experiences higher levels of inflation.

The second method used to increase tax revenue could be the heavily discussed one-off wealth tax. This would be effective as a 5% tax on property and pension wealth over £500,000 would raise £260 bn over 5 years, offsetting the immense costs of the covid pandemic crisis. This tax would be warranted as top 1% of individuals currently have an average of £15m of property wealth, which many deem to be excessive, hence a simple one-off tax is unlikely to affect those with large asset holdings too negatively, whilst also raising huge amounts of tax revenue.

However, the model behind the Laffer curve explains how an increase in tax rates beyond an optimal level can lead to a decrease in tax revenue. If high wealth families are going to be taxed more, this could incentivise them to find more ways to avoid taxes or possibly even relocate.

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