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Tax Yields

Volume 929: debated on Friday 1 April 1977

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asked the Chancellor of the Exchequer if he will publish a figure for the estimated percentage rise in total tax yield resulting from (a) economic growth of 1 per cent. and (b) inflation of 1 per cent., allowances and tax rates remaining unaltered and show the individual figures for each tax in turn, together with the weighting for each tax as it contributes to overall fiscal drag.

It is not possible to state with any accuracy the effect on total tax revenue of a 1 per cent. increase in economic growth. Such a calculation depends crucially on the pattern of growth at least in the short run. For example, if the increase in economic growth were concentrated in consumers' expenditure, more revenue would be raised from direct taxes than if it occurred through, say, growth in investment. However, in the long run the average tax yield might be expected to rise by between 1·2 and 1·5 per cent. for every 1 per cent. rise in GDP.The table below shows the percentage increase in revenue of individual taxes for a 1 per cent. rise in inflation. This is taken to mean a 1 per cent. rise in prices, money incomes, profits, the value of stocks, the value of estates at death, and for capital gains tax the value of disposals.

Percentage change in revenue as a result of a one per cent. rise in prices
VAT and car tax1·0
Other Customs and Excise Taxes0·8
Income Tax1·6
Corporation Tax0·75
Capital Gains Tax6·25
Capital Transfer Tax/Estate Duty2·0
Stamp Duties1·0
Total Tax Revenue1·3
Overall inflationary fiscal drag consists of two parts. First, the increase in revenue from income tax and capital transfer tax as a result of the rise in average tax rates as prices rise. Secondly, the offsetting effect from specific duties where the duty falls as a percentage of the price as prices rise. A 1 per cent. rise in prices would give £122 million fiscal drag from income tax offset by £45 million fiscal boost from specific duties. Overall fiscal drag would be £77 million.