The Record of Tax Reform in Great Britain and its Contribution to the Supply Side

Abstract

Tax reform in Britain has been directed to improving the supply side of the economy and to making markets work better. There have been three major reforming budgets, in 1979, 1984, and 1988. In 1979 and again in 1988 substantial changes were made to personal taxation. The standard rate of income tax has fallen from 33 percent in 1979 to 25 percent in 1988. Nine higher rate bands, with a top rate of 83 percent on earned income, have been collapsed into a single higher rate of 40 percent. A major change in business taxation was introduced in the 1984 Budget. Capital allowances were restructured, and the rate of tax was reduced from 52 percent to 35 percent. There have also been a number of smaller changes, designed to reduce the cost of employing labour, to encourage direct personal investment, and to strengthen the relationship between employee remuneration and the profitability of firms. Some taxes have been abolished and others changed in order to reduce tax induced distortions to the working of markets. Revenue has not been damaged by those reforms. During the same ten years the government has also eliminated the fiscal deficit. This paper details those developments, focusing on considerations of economic efficiency and incentives.