Tatton Teaser

Posted 29 May 2024

Managing Government debt with tax revenue is a balance, from James Sounders. With levels of Government debt increasing over the last few years across the world, and rival parties in the UK and US going back and forth on policies post the next election I thought a recent study in the Economics Observatory about (link) which taxes are best and worth for growth was timely.

In general, taxes have a negative impact on growth, at least in the short term, VAT disincentivises people to spend, and if not spent by the government (and instead used to reduce debt), GDP is directly reduced (you may recall GBP is C+I+G+X-M if you studied economics).

The article goes on do describe the modelled effects of income/corporation/indirect (like VAT) taxes on GDP and potential output using NIESRs model.

Corporation tax seems to be by far the worst option over time – which makes intuitive sense, the increase curtails company investment in the medium term which limits potential output in the longer term. The nuance between indirect taxes and direct ones like income tax come in who is taxed.  Indirect taxes tend to be regressive, i.e. impact lower income earners more than higher, whereas income taxes tend to be borne more by those on higher incomes, especially when evidence on higher taxes leading reduced working from anyone is mixed at best.

The rub obviously comes in communications, the way these are received by the public has a huge impact on what will actually happen. The authors argue that land taxes may actually be the best way to approach revenue raising, but what matters most to those seeking election is what will win votes, not economic logic.

Subscribe to the Tatton Weekly Email

Get the latest news from Tatton HQ directly into your inbox every week. Packed with industry insights, our weekly mailing will keep you informed on the latest news from Tatton and beyond.

You can unsubscribe at any time by clicking the link in the footer of our emails. For information about our privacy practices, please click here.

We use Mailchimp as our marketing platform. By clicking below to subscribe, you acknowledge that your information will be transferred to Mailchimp for processing. Learn more about Mailchimp’s privacy practices here.

Important notice:

The Tatton Weekly is provided for information purposes only and compiled from sources believed to be correct but cannot be guaranteed.  It should not be construed as an offer, or a solicitation of an offer, to buy or sell an investment or any related financial instruments. Any opinions, forecasts or estimates constitute a judgement as at the date of publication and do not necessarily reflect the views held throughout Tatton Investment Management Limited (Tatton). The Tatton Weekly has not been prepared in accordance with legal requirements designed to promote independent investment research. Retail investors should seek their own financial, tax, legal and regulatory advice regarding the appropriateness or otherwise of investing in any investment strategies and should understand that past performance is not a guide to future performance and the value of any investments may fall as well as rise and you may get back less than you invested.

Any reader of the Tatton Weekly should not use it as a guide or form the basis of a decision relating to the specific investment objectives, financial circumstances or particular needs of any recipient and it should not be regarded as a substitute for the exercise of investors' own judgement or the recommendations of a professional financial adviser. The data used in producing the Tatton Weekly is for your personal use and must not be reproduced or shared.

Please select all the ways you would like to hear from Tatton Investment Management: