Matt Sinclair: Tax reform without tax cuts is a political disaster; tax cuts without reform a missed opportunity

Matthew Sinclair is Director of The TaxPayers' Alliance. Follow Matthew on Twitter. This is the third of three blogs on today's TPA report recommending a 'Single Income Tax'. See earlier contributions from Matt Sinclair on a Family Transferable Allowance and Matthew Elliott on the general principle.

This week has seen the launch of the 2020 Tax Commission’s final report, outlining and calling for a new Single Income Tax. The report contains more than that plan though. It also provides a detailed study of the economics, ethics and politics of tax reform. And when it comes to the politics there are some useful lessons for any politician looking for a popular tax policy.

The first is that people don’t like paying tax. When asked if ‘people like me’ should pay more in tax, 73 per cent disagreed in a Guardian/ICM poll in June 2010. That might sound obvious but it is actually quite profoundly important.

The Tax Foundation has estimated that the country where the tax system leans most heavily on the rich, based on the ratio of the share of taxes of the richest decile divided by their share of market income, is the United States with a ratio of 1.35. Britain’s ratio is 1.20. By contrast, Denmark’s ratio is 1.02 and Sweden’s is 1.00. The large states in Scandinavia, that many social democrats would like to replicate, here can’t rest on taxing the rich but have instead been based on getting more revenue out of the broad mass of the population with a less progressive tax system. And even there they are in retreat.

If 73 per cent of Britons aren’t willing to pay more, then politicians can’t build a really big public sector that will last. Try to feed a Viking state with an Anglo Saxon tax system and you’ll have Gordon Brown’s fiscal disaster. The old Treasury rule of thumb does appear to hold true and 40 per cent of national income is the ceiling on the sustainable share of public spending in national income.

Voters’ opposition to paying more themselves is far more powerful than their feelings about the taxes paid by others. In a YouGov poll where people were allowed to choose up to three issues that were important for their family, 28 per cent chose tax (which often ranks above issues like education and immigration), whereas only 13 per cent chose it as an important issue for the country as a whole.

That matters because it means that reforms that cut taxes for unpopular minorities (like the rich) can still be popular if they also cut taxes for most voters. Whatever people think of the measures that affect other people, they care far more about the measures that affect them.

You can see the same pattern in the political success of the Lawson tax cuts in 1988, after which the Tories continued to ride high in the polls at an incredible 46 per cent, despite some of the individual measures within the Budget polling poorly. It also fits with the earlier success of the Kennedy/Johnson tax cuts in the United States, which were far more regressive than the later Reagan tax cuts but also represented a tax cut for most voters. By contrast, the Poll Tax and early attempts to introduce a General Sales Tax on a revenue neutral basis in Australia were deeply unpopular as they raised taxes for most voters.

Conservatives hoping for a majority therefore shouldn’t be overly hung up on whether or not each individual measure in a tax reform package is popular or unpopular. The critical question will be what effect people expect it to have on their own living standards; whether they get a tax cut.

Then over time even initially controversial reforms tend to be locked in because they deliver results: greater economic growth, more jobs and stronger revenue than expected. While new complications often seep back into the tax code over time after a major reform, lower rates tend to last. Eastern Europe’s flat taxes have mostly stuck.

Even the notoriously radical and detailed Labour manifesto in 1983 largely failed to challenge the changes in tax rates laid down by the Thatcher Government. That Government was rewarded for delivering on its simple 1979 pledge to “cut income tax at all levels”. The pledge played a key part in the Conservatives’ election victory, the greatest swing in their favour since 1945, and particularly appealed to first time voters.

Understanding these features of public opinion makes it clear why the Budget was unpopular. While the cut in the 50p rate might have been the salt that made them more painful, the real wounds were the Granny Tax, the Pasty Tax, the Caravan Tax and all the other tax hikes that gave too many voters the clear impression they would end up paying more.

Many commentators think the only serious tax reform packages are revenue neutral. They believe that setting out a path for lower taxes is somehow cheating. They are 100 per cent wrong. Actually tax cuts are the only realistic way to get a simpler, more efficient tax system. The current system’s dysfunctions aren’t just an unfortunate accident. They’re the result of trying to raise too much money and applying sticking plasters to the worst of the resulting problems.

Tax reform without tax cuts is a political disaster; tax cuts without tax reform are a missed opportunity. There is a huge political opportunity in offering both.

> Read the full 'Single Income Tax' report at The TaxPayers' Alliance (PDF).