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Measuring the productivity of the UK tax system

This project aims to create a consistent long-run analysis of the UK tax system, from around 1850 to present, using archived documents from Inland Revenue. We see three main advantages of this work:

First, tax collection is an unambiguous and consistent function of government, with little change in its objective over time – it thus offers the possibility to estimate, by proxy, the productivity of government administration on a fairly consistent basis over a very long time series (indeed the rest of the economy suffers from a lack of such consistent long-run measures as well).

Second, tax collection is an area of official Public Service Productivity stats that is currently measured indirectly (inputs=output), so trialling this method offers potential inroads in official stats in future.

Third, it illuminates some interesting challenges and opportunities when trying to estimate productivity of a specific sector/activity: working with archival material, without need for classification conversion or national accounts, etc.

We have extracted data on the costs and outputs of the tax collection process. This allows us to build a fairly crude productivity estimate of the last 150 years, as well as something more sophisticated since 1950. The approach follows loosely the Atkinson principles that underlie official Public Service Productivity estimates: the output of tax collection is the volume of taxes collected, while the inputs are our best estimates of the volume of labour, capital and intermediate inputs. A similar measure is the cost:yield ratio – how much tax is collected per £ spend. We have a full time series of this measure. We also have estimates of the volume of labour employed at Inland Revenue from 1850 to present, and some estimates of intermediates and capital. We can also breakdown total tax collected into at least the two main types: income tax and corporation tax (and their predecessors). However, the amount of tax collected is not only a function of the effort of Inland Revenue but also the available taxes – the tax base. We also estimate this as an ‘input’ (or else a controlling factor). The work is inspired by similar work in the US by David Lakagos (UCSD) and Anders Jensen (Harvard).

Main Researcher: Josh Martin Bank of England and Economic and Statistics Centre of Excellence (ESCoE)