British Prime Minister Liz Truss’s Pro-Growth Tax Plan

By SBE Council at 27 September, 2022, 11:33 am

by Raymond J. Keating –

Whatever one would like to say – positive or negative – about former British Prime Minister Boris Johnson, he clearly was pushing tax policy in the wrong direction. But the United Kingdom’s new prime minister, Liz Truss, along with the new chancellor of the exchequer, Kwasi Kwartengis, are turning tax policy in a welcome, more pro-growth direction.

Johnson’s government, including the previous chancellor of the exchequer, Rishi Sunak, was going to increase the corporate tax rate from 19 percent to 25 percent in April 2023. Plus, they were pushing for a 1.25 percentage point increase in a tax known as the National Insurance Contributions on employers, employees and investment income. Johnson also imposed a 2.5 percentage-point increase in the payroll tax.

Truss would kill the 2.5 percentage point increase in the payroll tax, the increase in the corporate tax rate and the hike in the NIC tax. That’s great.

But the good news doesn’t stop there. A reduction in a mid-range personal income tax rate – from 20 percent to 19 percent – would be moved up, and Truss-Kwartengis want to eliminate the U.K.’s top tax rate of 45 percent, with the top rate then being 40 percent.

Also, temporary de facto expensing by businesses of up to 1 million pounds, rather being allowed to drop back to 200,000 pounds, instead would be made permanent.

These largely supply-side tax cuts would enhance business investment in the U.K., which is exactly what that country needs. Indeed, it’s exactly what the U.S. needs as well. Lawmakers in both the U.K. and the U.S. would do well to ignore the misinformed critics of the Truss plan, and instead get back to sound economic thinking on taxes in hard times.

For example, the Truss plan would not be inflationary, as some mistakenly assert, but rather would work against inflation. When confronted by stagflation, the economy needs changes in policy that incentivize entrepreneurship and investment, and that’s what this plan would do.

Kudos to Prime Minister Truss and Chancellor Kwartengis on their efforts to move tax policy in a pro-growth direction in the U.K.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His latest book is The Weekly Economist: 52 Quick Reads to Help You Think Like an Economist.