By William Schomberg
LONDON (Reuters) - Britain should increase taxes on the self-employed and homeowners, as well as on capital gains, as part of an overhaul to fund more spending on public services and welfare, a leading think tank said on Thursday.
British tax revenues are the highest as a share of the economy since the 1940s with employees paying more on their incomes while money made from owning a business or owning wealth has been less penalised, the Institute for Fiscal Studies said.
"Better designed taxes would make us more productive, and therefore ultimately richer," IFS deputy director Helen Miller said.
"Taxes could also be fairer if we stopped taxing very similar people in very different ways."
Prime Minister Rishi Sunak and finance minister Jeremy Hunt are under pressure from some lawmakers in their Conservative Party to cut taxes before an election expected next year.
But Sunak and Hunt are already close to breaking their fiscal rules and the strain on the public purse from an ageing population are likely to grow in the coming decades.
While the British government's tax take is high by historic standards at 33.5% of gross domestic product in 2021, it is well below that in other big western European countries which is nearer 40%, according to OECD figures.
In a report, the IFS said lower tax rates on income from capital, compared with those on employment, were distorting the labour market by encouraging self-employment and leading to people with similar earnings facing very different tax bills.
Lower taxes on wealth and the exemption from capital gains tax of sales of people's primary homes were creating a clear intergenerational divide, while local property taxes used relative valuations that were 30 years out of data, it said.
On corporate taxes, uncertainty about investment incentives hampered Britain's already weak levels of business investment while varying tax rates on greenhouse gas emissions made reducing them more costly than needed.
"Better-designed taxes could bring real benefits, including by supporting higher economic growth and facilitating the move to net zero," the report said. "Tax could and should be part of the solution to future challenges rather than part of the problem."
(Writing by William Schomberg)