Tax structure, growth, and welfare in the UK

Abstract

This paper studies the quantitative implications of changes in the composition of taxes for long-run growth and welfare in the UK economy. Our results suggest that if the goal of tax policy is to promote long-run growth by altering relative tax rates in a budget neutral fashion, then it should reduce labour taxes and increase capital and/or consumption taxes. In contrast, if the aim is to promote welfare, substantial gains can be obtained from tax reforms that decrease the capital tax rate relative to the labour and consumption tax rates or that reduce labour relative to consumption taxes. These findings highlight the importance of the choice of tax structure in policy design.