By Lucy Parsons, Senior Economics Researcher, Reform
Yesterday, Mark Hoban sacrificed breakfast to come and talk at a Reform event on tax. For those readers unsure as to whether tax is something that would make them get out of bed early, Reform’s new report may give you a reason to think again. The reality is that the scale of the public finances crisis is so great that tax rises are inevitable whatever the outcome of the election.
Indeed, taxes are already going up. The Government’s proposals for the fiscal tightening are to raise about one pound in three from taxes. George Osborne’s plans would mean around one pound in five. Reform has argued for a smaller burden to fall on taxes. Canada provides a good rule of thumb. The1995 Budget included CA$7 in spending reductions for every CA$1 increase in tax revenues. The result was public support for the process of restoring the public finances – as the burden was on government getting its own house in order rather than placing the burden on taxpayers. Applying this to the UK would mean extra taxes of around £12 billion, equivalent to £500 per family per year.
The honest debate that needs to be had is about how to raise this extra money. The Government plans to raise £9.3 billion from the 50p rate and a 1 per cent increase in National Insurance Contributions from April 2011. At a time when unemployment grew by 22 per cent in the last year, putting up taxes on labour is the most economically damaging way to go about it. A recent CIPD/KPMG survey showed that one in eight employers was planning to recruit fewer staff because of the NICs increase. FTSE 100 chairmen have described the 50p rate to Reform as the tipping point that stops the UK looking like a country that wants to attract business.
These are bad policies which should be abolished or reversed immediately. The Opposition are wrong not to commit to doing this. Tax policy is about choices. There are far better ways that government can collect more revenue.
The basic goal of an efficient and fair tax system is a maximum number of taxpayers and a minimum level of rates. An increase in the rate of VAT is widely expected, but the much better option is to broaden the base. The UK is unusual in the vast number of items on which a zero or reduced rate of VAT is charged. Only three other European countries apply a zero rate to food. Only two others apply a zero or reduced rate to children’s clothes. Politicians are wary of getting rid of these reliefs because VAT is believed to fall more heavily on low income families. Reform has calculated that all cash benefits could be increased by 7.5 per cent to ensure that the poorest third of households do not lose from this change, while still raising an extra £15 billion in revenues.
These are the obvious tax changes which should be made immediately. The Conservatives have other policies on the table which may have made more sense in a different economic environment. Cutting corporation tax rates may be desirable in the longer-term, but the businesses we have talked to tell us is that they care more about predictability and transparency than low headline rates. The quality of tax policy has collapsed in recent years into a series of arbitrary unprincipled announcements. Likewise, cutting inheritance tax by raising the threshold cannot be a priority while taxes on jobs are going up.
While these two policies may be sensible aims for the long term, tax breaks for married couples should not be an aspiration even once the economic recovery is underway. They would see money poorly spent because they would not achieve the objective of halting the decline of marriage and they would be completely out of line with the direction of travel of most other modern tax systems.
The Government has set out plans for raising some extra taxes. The Opposition has said that it will abolish these at some point and set out a further series of long-term ambitions for tax cuts. No one is in favour of higher taxes. But a tax package based on a string of cuts is misleading. The regrettable truth is that taxes will have to go up, to help reduce the deficit in the short term before the full effects of spending reform take place. Some tax rises will also helpfully restore the link between public spending and taxes by reminding the electorate that spending has to be paid for.
