Andrew Lilico: What should we say about taxes?

The latter phase of the Major government was subjected to a particularly effective alliterative Labour mantra — “Twenty-two Tory Tax rises”.  The idea was that in 1992 John Major had promised not to raise taxes — indeed had strongly attacked Labour for various tax-raising proposals — but had then raised taxes many times.  Perhaps partly as a consequence of this, in opposition the Conservatives have regularly come under considerable pressure to make unequivocal promises about taxes.  In both 2001 and 2005 we went into the General Elections promising tax cuts, with our only clear basis for paying for these being cuts in fraud and waste.

Now, as far as I can see, no-one doubts that government expenditure involves fraud and waste, but equally few people seriously believe that any one party will be materially more effective at cutting down on fraud and waste than any other party.  Do you believe this, Dear Reader?  Do you believe that Gordon Brown is not bothering to reduce fraud and waste, benignly looking the other way, but that a Conservative administration would effectively and efficiently eliminate it all?  I don’t.  I object to Gordon Brown’s government in all kinds of ways, but a belief that it is inefficient, except insofar as that is a natural concomitant of socialist methods of micromanagement and planning, is not amongst them.

Now we have a new formula.  We will “share the proceeds of growth”, having “put stability first”, and will “not commit to any upfront unfunded tax cuts”.  But we face pressure from our own side to commit to tax cuts, and journalists ask whether we really believe that a low-tax economy is more dynamic — and, if so, what is supposed to be the problem with committing to lower taxes?

In my view, all of these approaches suffer from the same confusion: they see the level of taxes as a startpoint, when in fact it is a residual — that is to say, the level of taxes is just the balancing item at the end of our political programme.  The right approach, in my view, is to begin by asking what it is that we want the state to be involved in, and what is best left to the market and the voluntary sector.  Then amongst those things in which the state is to be involved, we ask what is best dealt with by regulation or by the facilitation of (or compulsion to) private or voluntary provision, and what is best addressed by state provision or by state funding.  This then tell us how much we need to spend.  Then, knowing how much we need to spend, we know how much we need to raise in taxes, and we have our answer for the level of taxation — the level of taxation is the result, not the startpoint.

If, instead, we accept that the level of taxes is our startpoint, we reinforce a negative image that the voters have of us — as driven by financial considerations, rather than consideration of what will best help the poor and the disadvantaged, or what will best meet the needs of the many.  Then when we do come to propose reforms of public services, people see them through this financial lens — they believe that our ambition is just to cut down how much tax rich people pay, because at our core we dislike helping the poor any more than we can get away with.  This whole finance-driven concept of Conservative politics should be eschewed.

This means that a policy of “no tax cuts” is just as bad as a policy of “tax cuts”.  Each of them starts from the wrong, financially-oriented place.  We should not have any policy about the overall level of tax — merely a policy about the overall level of spending.  If asked about how much we intend to tax, we should simply take the opportunity to explain our spending plans — for overall taxation plans have no meaning by themselves.
This does not, however, mean that we cannot have any tax policies other than those arising as a residual.  It is perfectly proper for us to have policies about the forms in which taxes are raised.  For example, there was a debate in the 1970s about income versus consumption taxes, and when Mrs Thatcher came to power there was a very considerable rebalancing of taxation — a large increase in VAT and a cut in income taxes.  In our own time, I suggest there are three areas within taxation that Conservatives should engage with:

• The balance between green taxes and other taxes — I suggest that green taxes should rise as a proportion of the total tax take.
• The balance between income tax rates and the number of people that pay income tax — I suggest that personal allowances should be raised aggressively and the basic rate raised (say, back to 25p), so that fewer people pay any income tax at all.
• Inheritance tax — this is an iniquitous tax in principle, promoting a concept of equality of opportunity that Conservatives should disagree with fundamentally wherein we should all succeed or fail solely on our biological merit.  It should be abolished.

So, when asked about what our policies on taxation are, we should say that our overall plans are to spend £XYZ, which we would fund with taxes that, compared to today, involve more green taxes, fewer people paying any tax at all, and no-one paying inheritance tax.

Comments

[James M]

An excellent article.

If in my business I said that I intended to spend a figure just plucked out of my head or cut spending my another equally random figure without effectively asking what services I was intending to offer and how much it will cost to offer them, I would soon struggle.

I agree with George Osbourne that taxation should not be seen as the only component of effective economic policy, but equally I agree with Andrew that we are starting from the wrong point - we are attempting to devise an answer, without really knowing the question.

Moreover, if we actually said to the public that we wanted a smaller state and that we were going to undertake a full review of what services should be run by the state, which ones funded by the state and run by other providers (private & voluntary) and which ones would have no state involvement, bar perhaps a limited regulatory framework of minimum required standards and once this has been completed we will provide a detailed assessment of the taxation needed for this - we would get more respect for being open, honest and pragmatic. It may even assist in improving our reputation for economic competency with the British Public.

I also support your three taxation directions Andrew - I too would like to see the Conservative Party remove more people on lower earnings from paying income tax altogether.

[Ken Stevens]

I am wary when politicians get on the green tax bandwagon! "There you go, people, carry on with what you're doing but salve your consciences by chucking a few coins in the hat." -- A bit like the medieval sale of religious indulgences, a.k.a. 'get out of sin' cards!

Such taxes (or other measures) will only be accepted at face value if correctly targetted. For example, rather than tax the end-user for excess packaging, junk mail, etc disposal, it is the creator of the material that should be taxed. That would minimise the scale of the problem ,rather than merely deal with the aftermath.

[TaxCutter]

People want tax cuts because they think the price of government is too high for what they get. And there is nothing wrong with that logic. Whilst controlling spending imperative, tax reforms can act independently, because:

1. Cutting the right taxes actually increases tax revenues, see Ireland, Australia and the US on this one, and feeds further tax cuts or additional spending

2. There is much in the current UK tax regime that can be improved by simplification

Raising the basic rate back to 25p would be retrospect, raising marginal rates normally reduces economic growth plus it would give Labour a free shot. Why can't personal allowances be raised and the basic rate be the same or cut?

And why should Green taxes go up due to some disputable scientific theory. UK fuel taxes and airport duty are amongst the highest in the world already?

Its time for the Conservatives to go on the offensive on both cutting taxes and Labour's lack of control over public spending

[malcolm]

Andrew the billions lost in the tax credit fiasco are a perfect example of Gordon Brown 'looking the other way' to fraud and waste.
It is also true that this PM perhaps more than any other has sought to divert funds to his heartlands and make his constituency reliant on the state.
Can we do better? I don't honestly know.But I do not think we can possibly be worse.

[Tony Makara]

Taxcutter, I agree. There is far too much government waste in terms of quangos and failed Labour party flagship programmes like the New Deal. Of course tax cuts should only come when the economy can afford it. However simply by closing down many of Labour's pet programmes money could be re-located to reduce the burden of taxation. So long as essential services are maintained the public would wholeheartedly support tax cuts.

[Eveleigh]

An excellent thought provoking article. I particularly like the idea of starting off by deciding what it is that the taxpayer, via the state, should be paying for. I would like to see fewer poor people tax but my concern would be that people who don't pay tax always think that those who do pay should pay more.

[Terry]

Andrew, a couple of questions, both related to personal tax:

What about National Insurance Contributions (NIC)? These are widely seen as just another tax. Would you recommend their amalgamation with the rest of the tax system or try to make them more obviously linked to specific benefits such as the basic pension.

Also, I can see disadvantages with raising the threshold at which tax is paid and then increasing the basic rate to say 25%. Obviously, the step increase is larger 0% to 25% which can act as a marginal disincentive to extra effort especially if NIC is then added on. Also, we are all citizens and should all share some of the burden, rather than having a class of taxpayers and a class of tax consumers. What is your view on this point?

[Yet Another Anon]

If Income Tax was turned into a flat tax at a 25% rate then raising the Basic Rate back to 25% would be acceptable, otherwise people are going to suspect that it amounted to a postponed stealth increase in that subsequently it would return to the threshold being frozen or increased by inflation and gradually the number of people paying Income Tax would go up again. I would like to see the threshold of Income Tax raised towards average earnings and for rates to go down towards 10% and for public spending to be substantially cut as a proportion of GDP and the method of raising revenue switching more to commercial activity and taxes on sale of property and VAT.

As for IHT - it takes up a huge amount of public time in discussion, it raises little in proportion to the total budget and it causes distress to bereaved families and mainly falls on those on middle incomes, so it would be best to abolish it.

Phasing out National Insurance should also be a priority and merging Income Tax and Capital Gains Tax with a single threshold for assessable Income and Capital Gains.

[Mountjoy]

Absolutely right. The Conservatives need to be going into the election as a lower-tax party, in order to give people a reason to vote for them, but whilst stressing that the importance of economic growth (as opposed to just stability -- which can imply stagnation) ... which it would be with targeted tax cuts. Tax cuts are key to a competitive economy (i.e. competitive against China etc).

[Conservative Man]

So, let me think. I need a new home, it has to have a host of features (as any civilised home would). After I have decided what home I must have, I can look at what salary I must now earn. Does it strike anyone else that this might just be the wrong way around?

We spend what we can afford and we should never advocate damaging the underlying economy through over taxation. We all know we are beyond the point of efficient taxation at the moment, as does Gordon Brown (which is why his taxes have been stealth).

I do agree that the best way to reduce the size of the state is if we sit down and think of what services we really need to supply in future. Indeed philosophically I believe cutting spending and promoting personal responsibility is more laudable objective than cutting taxes.

The real problem is that Labour has created a large number of clients of government largesse, thus any arguments for a smaller state face a visceral and vocal opposition. The question for Conservatives is do we give up, as the political price of spending cuts is high? If that is our position, are we happy tacitly accepting as preferable the economic and social costs of an extensive nanny state which necessitates such high taxation?

[TimC]

Conservative Man, your home-buying scenario is perhaps the wrong way around for you as an individual. But the state is not an individual and unlike an individual (an average one anyway) it can set its own income level through taxation and other means. Whereas that is something that an individual can not do as instantaneously as the state.

The whole argument from this article, with which I agree, comes down to the question: "What is the role of the state, and how far should it intervene in society?" I would think that most conservatives would view the state as too interventionist, thus it requires more money to do its intervening. A smaller state will lead to a sounder economic state and Conservatives should not back away from this line of argument.

[Michele Imperi]

The approach to taxation should be subordinated to a coherent economic policy . "Sharing the proceeds of growth and putting stability first" are good soundbites and are good aims for any government of any political inclination. The end impression however could turn out to be that of just meaningless soundbites if we cannot communicate our mission statement or a coherent economic programme . I agree with Andrew , cutting taxes should not be the startpoint of the programme of a government in waiting but it should definetely be a desirable aim along with the provision of better public services in a coherent programme . It should not even be too difficult to convince the voters that so far the avalanche of taxation money collected has achieved no tangible results , after all we are continuosly fed news by the media of how the NHS is mismanaged , Schools are failing , Police is not present on the street and so on. There could be many ways to promote a programme of public service reforms leading to an overall decrease in the burden of taxation . Unfortunately all we seem to get nowadays are lots of good ideas thrown about by the policy reviews which may seem confusing if we do not organize them soon in a clear programme with a clear mission statement.

[jorgen]

The Conservative Party should want to improve the conditions in the private sector, so lots of new jobs will be created. This means get rid of excess regulation of the private sector, tax cuts and small government. Unless there are plenty of jobs around, you can't expect 1) the unemployed to become employed and 2) public employees to move to private sector.

Green taxes are based on a more than shaky foundation and should be dropped for that reason alone.

[Mark Wadsworth]

Good article, all in all, but as Malcolm and Tony Makara point out, there is massive deliberate waste and fraud and so on. That is easily fixed.

[Peter Franklin]

This week I agree with you, Andrew!

[Tanuki]

'Green' taxes are a fool's errand. If they truly do change people's supposedly harmful behaviours (as suggested) then people will move away from doing the taxed-activity - which reduces the revenue gained from the tax. And then you're screwed.

In the meantime, the population as a whole sees green taxation as milking them for the temerity of undertaking ordinary everyday activities [driving, flying, heating their houses] for which there is - honestly - no alternative.

Some of us weren't born yesterday: in my world 'green' always means naiive and inexperienced and gullible!

[Ken Stevens]

Tanuki | August 21, 08:54 PM
"If they truly do change people's supposedly harmful behaviours (as suggested) then people will move away from doing the taxed-activity - which reduces the revenue gained from the tax. And then you're screwed."

Think parking fines & speed cameras, supposedly aimed at modifying behaviour for the general public good. Where would councils be without the constant revenue stream?

[Andrew Lilico]

Thanks for the kind remarks and criticism.

My views on NI would take a column and discussion of their own, but suffice it to say that I do not favour the fusing of NI and income tax, but would prefer to see NI used as the basis of a large extension of state-provided insurance, as set out briefly here (p21): http://www.bowgroup.org/harriercollectionitems/ideasbook.pdf

I may write on this in more detail at a later date.

On whether there would be slippage if the basic rate were raised to 25% and allowances raised to eliminate more from income tax-paying, I have previously proposed having an explicit target for reducing the numbers paying income tax (at the time of the Bow Group Ideas Book link I gave above (2000), I was proposing that this target should be that less than half of adults would pay income tax within a Parliament. This may no longer be feasible, but some appropriate alternative target (40%, say) could be devised at the time of taking office. In the meantime we could say that it is our ambition to have a target number of people taken out of income tax, and have someone float some indicative figures without our committing to anything specific, yet.).

Green taxes are not self-defeating. I'm afraid that is just confused. The idea of green taxes is to make those engaging in environmentally-damaging activities include the associated environmental costs in their decision-making. That will not mean that they cease to do the environmentally-damaging activity at all (unless the tax is set excesssively high). Two examples: 1) We have fuel taxes, but people still drive. They just drive less than they would if there were no fuel taxes. 2) If we had a rubbish tax, then people would have incentives to cut down on how much rubbish they produced. But we would not expect them to cease to produce rubbish altogether. Green taxes are rather like dentistry - regardless of what they say, it's not truly their ambition to put themselves out of a job.

[Graeme Archer]

"Green taxes are rather like dentistry"

I think you should copyright that analogy Andrew, it's brilliant!