Ryan Shorthouse and Sam Robinson: Tax reforms, not tax cuts, are what the Government needs to deliver

27 Apr

Ryan Shorthouse is the CEO of Bright Blue and Sam Robinson is a senior researcher at Bright Blue. They have co-authored a new report, ‘A vision for tax reform in the 2020s’

The UK Government has, rightly, committed to three preeminent economic, social, and environmental objectives in the years ahead: boosting growth and living standards; levelling up the country; and achieving net zero greenhouse gas emissions by 2050. 

Unusually for a Conservative Government, there is a high degree of tolerance for historically high levels of taxation and spending. This is a very different situation to after the 2008 financial crisis, when the Coalition Government cut both taxes and spending – the latter deeply.

The Chancellor recently announced the Spring Statement Tax Plan, with a vision for a lower tax economy. This seemed to mark a return to conventional conservative thinking. But official Government policy is still consistent with a more social-democratic model.

If high levels of public spending to meet major objectives are to be maintained whilst servicing current budget surpluses, this country will need to pursue a tax reforming – not solely a tax cutting – agenda. As well as shoring up the public finances, tax reform can also play a positive part in achieving economic, social, and environmental objectives.

We believe the Chancellor can be much more ambitious with tax during this Parliament. Nevertheless, reforms to taxation can be incredibly politically contentious, meaning it is under-utilised as a tool to help achieve positive and far-reaching change. 

If tax reforms are to be both effective and ambitious, it is vital that proposals derive from clear principles that attract sufficient political support. For the past two years, the team behind Bright Blue’s project on tax reform has sought to do exactly this. We now propose nine key principles that should underpin an ambitious programme of reform, supported by policy recommendations to achieve them. 

First, that the tax system supports effort, enterprise, and entrepreneurialism. Tax in the UK is increasingly falling on income from work rather than from other activities. It should be an urgent priority to better reward people’s effort by reducing taxes on work, especially National Insurance and the Health and Social Care Levy. Doing this, alongside broadening their scope to include pensions and rental income, would spread the impact of these taxes more evenly across the incomes and ages, reversing the troublesome shift of overall tax onto workers.

Second, the system should fairly tax income derived from luck, rent-seeking, and externalities. If the tax system adequately taxed income derived from these sources, we could lower taxes on more productive activities in a more sustainable manner. For example, Inheritance Tax’s current design means that many life-enhancing transfers of wealth go untaxed. It should be replaced with a Lifetime Receipts Tax.

Third, activities by individuals and institutions should be treated more equally. The current design of the tax system leaves individuals and institutions receiving the same amount of income paying vastly different effective tax rates. Self-employed people pay considerably less than workers, largely thanks to Employers’ National Insurance, meaning businesses have an incentive to contract labour on a self-employed basis. The Treasury should aim to reduce the difference between employees and the self-employed, initially by focusing on cutting employers’ National Insurance Contributions.

Fourth, tax policy should incentivise investment to facilitate long-term growth. The Government has recognised the role tax policy can play in spurring business investment through the ‘super-deduction’. However, this currently ends in 2023, and the headline Corporation Tax rates are scheduled to rise. The UK therefore has one of the least generous systems of capital allowances among OECD countries. The Treasury should move to a system of full immediate expensing of capital investment when the super-deduction expires in 2023.

Fifth, we need to ensure sound public finances. Simply borrowing more and more to meet today’s spending demands is economically and morally unacceptable. A tax-reforming agenda needs to ensure that the UK’s fiscal trajectory is sustainable, whilst also ensuring value for money in both spending and tax reliefs. The Government could follow the German model, which legally mandates biannual reviews of corporate tax reliefs based on a standard evaluative framework including: target accuracy, cost-effectiveness, necessity, and sustainability. 

Sixth, taxes should be easier to understand and harder to avoid. A needlessly complex tax system is confusing, reducing tax transparency and politicians’ ability to explain what tax reforms are achieving. Some taxes – particularly Inheritance Tax – are easily avoided. The Government ought to tighten eligibility for key Inheritance Tax reliefs such as Agricultural Property Relief or Business Property Relief.

Seventh, the tax system should support the Net Zero agenda. The UK’s current carbon pricing across different economic sectors is insufficient. Certain sectors such as aviation and residential gas effectively receive subsidies for carbon emissions. A standard, economy-wide carbon tax is not feasible. However, the Government should set a target price range for carbon taxes across the whole economy by 2030, with a ‘floor price’ that each economic sector would have to achieve at a minimum, to facilitate consistent carbon prices across different sectors. 

Eighth, future reforms should protect and enhance the livelihoods of the poorest. The Government has taken action to blunt the impact of the new Health and Social Care Levy, but more should be done with tax to protect the poorest. A new ‘Green Dividend Framework’ should be established, made up of the revenues from existing and new carbon pricing measures; a specific portion of funds from these revenues should be used to reduce the impact of rising prices on low-income households and vulnerable customers.

Ninth, our tax system should address regional imbalances. Council Tax falls disproportionately on properties outside of the South East. Stamp Duty Land Tax also plays a part in slowing progress on levelling up by removing incentives to move home. It is time to replace both taxes with a Proportional Property Tax based on the value of people’s homes, with tax exemptions for those under £50,000.

The recent Spring Statement Tax Plan can and should be supplemented: to not just always ideologically fixate on lowering taxes, but to use tax as a tool to help a much wider set of economic, social and environmental goals. Ultimately, we believe that tax can achieve its potential as a substantial policy lever that facilitates bigger and bolder changes.

Tom Clougherty: The Chancellor can help households next week by raising tax thresholds and rebooting energy policy

16 Mar

It can’t currently be much fun being Rishi Sunak. Next week’s Spring Statement was supposed to be dull. He would update us on the economy and the public finances, announce a few worthy policy reviews and consultations, confirm previously announced plans, and sit down.

Instead, only days to go, the Chancellor finds himself facing surging inflation, a cost of living crisis, and war in Europe. People want him to cut taxes, raise benefits, spend more on defence (and a hundred other things) and still keep the public finances ticking towards balance. Good luck with that.

Politically and practically, the rising cost of living – driven primarily by energy prices – is Sunak’s most immediate and important challenge. Things were bad even before Russia invaded Ukraine, but the conflict’s appalling humanitarian cost will likely be accompanied by still-higher energy prices and even an inflationary supply shock to global food markets.

So rising prices will be with us for a while. With little sign of corresponding wage increases, households across the country will be pinched. Sadly, there isn’t much the Chancellor can do about global prices. All he can currently do is help us to adapt, while sheltering the most vulnerable households from inflation’s impact.

On electricity and gas bills, the Chancellor will probably argue – with justification – that he has already responded to the pending increase in the energy price cap, and that further measures should wait until the energy price cap rises again in October.

Another possibility is help for motorists. Sunak has been urged to follow France, Sweden, Ireland, and the Netherlands’ examples by cutting fuel duty. The RAC says that rising VAT receipts from higher pump prices could be recycled into a 5p/litre cut. I’m not convinced that’s the best use of scarce fiscal firepower (especially with an ongoing ambitious transition to electric vehicles). Voters may also not notice the saving or credit the Chancellor for it. Still, my fellow motorists wouldn’t say no.

If policy changes are intended to offset cost of living pressures, it’s generally better they align with longer term plans, or have their own convincing rationale. The Chancellor could turn to two such ideas. Firstly, he could move some green levies off energy bills and fund any connected environmental programmes from general taxation. It makes sense for carbon costs to be reflected in consumer prices, but not that other commitments are loaded onto household bills.

Another sensible change would be to base automatic increases to benefits (and, ideally, tax thresholds) on the most up-to-date inflation figures we have, rather than those of six months ago. There’s no particular reason why we use such a lagged indicator. Switching to more timely and accurate uprating would help households now, but also constitute a general rationalisation. Benefits, credits, thresholds, and allowances could also be uprated alongside forecast inflation, with subsequent adjustments for over- or undershoots.

Of course, if we’re talking about rational and coherent policy, we can’t overlook the National Insurance hike soon set to take effect – which is, alas, neither. It is scarcely believable that any government, let alone a Conservative one, would choose to raise taxes on workers and employers during a cost of living crunch.

And yet here we are. If people need money, the first thing the government should do is let them keep more of what they earn. To do otherwise is politically perverse, economically destructive, and a betrayal of conservative principle.

It is also unnecessary. There is no pressing need to ‘pay down Covid debt’. The best way to pay for a one-off, pandemic-induced NHS backlog is by borrowing the money and spreading the cost over time. The Treasury is understandably worried about rising borrowing costs, but, generally, people are still prepared to lend to the government extremely cheaply. That is unlikely to change soon.

Of course, we should never borrow and spend just for it’s own sake. Balancing the budget, streamlining the state, and protecting future generations are noble goals. But there’s a question of priorities – and the decision to put fiscal targets ahead of hard-working households and their shrinking incomes suggests the wrong ones.

If the National Insurance rises can’t be cancelled or deferred, then the Chancellor should do what the Centre for Policy Studies has suggested and raise the primary threshold for individuals. That way no-one earning the average wage or below would lose out.

Such an approach would also give the Chancellor an opportunity to make good on a key 2019 manifesto promise to raise the threshold for National Insurance towards the personal allowance for income tax. It would cost around a third of the expected revenue from the health and social care levy.

In the longer term? Recent events have made clear that the government’s energy policy needs rebooting. So anything the Chancellor can do to remove barriers to new nuclear and renewables, as well as offshore oil and gas extraction (and even fracking) would be welcome. Crucially, that includes rejecting calls for counterproductive windfall taxes.

The Chancellor should also build on his recent Mais lecture, which focused on the need to ‘accelerate growth and rejuvenate our national productivity’, with a particular emphasis on business investment, skills, and research and development.

There’s an especially pressing need for policymaking for the first, given that we’re a year away from the corporation tax rate rising, the investment super-deduction expiring, and the annual investment allowance falling precipitously.

The Chancellor will likely announce a new, permanent approach to taxing business investment in this autumn’s Budget. For now, he must reassure business that he understands their concerns, and invite views on what a more investment-friendly corporation tax regime would look like.

I realise that’s an awfully long way from war, inflation, and energy crisis. But I suspect it’s precisely the sort of thing that Rishi Sunak hoped he would be originally able to focus on in his Spring Statement.

Tom Clougherty is Head of Tax & Editorial Director at the Centre for Policy Studies.

John Redwood: My critique of the Chancellor’s Mais Lecture, and what the Government should do next

7 Mar

Sir John Redwood is MP for Wokingham, and is a former Secretary of State for Wales.

Amidst all the harrowing reports from Ukraine and the deaths and destruction wrought there by Russia, the Chancellor has sought to chart a course for the economy for the next couple of years.

In his Mais lecture he echoed his predecessor, Philip Hammond, in seeking a productivity breakthrough. He also reaffirmed the Maastricht rules approach to economic management, wanting tax rises to get the deficit down first. The Treasury should note that its role model the EU has abandoned these rules for the time being, and is pursuing monetary and fiscal expansion.

The lecture was wrong to deny that lower tax rates can bring in more revenues. The Republic of Ireland has been a shining example of this, boosting its per capita GDP far higher than ours or the lower level of the  EU by attracting huge investments through a 12.5 per cent Corporation Tax rate.

Their business taxes offer a higher percentage of total tax take than our higher rates. The Chancellor ignores the findings of Margaret Thatcher and Nigel Lawson who he praises. They produced a surge in revenues from higher paid people by major cuts in income tax rates.

The Government should take the cost of living crisis more seriously. In accordance with the Mais lecture, it needs to create the conditions for private sector investment in creating more better-paid jobs and in producing more of the goods and services we need at home.

Levelling up needs to be private sector led, and offer people the chance to set up and run their own businesses, be trained for better paid employment, and find ladders of opportunity in the areas attracting the projects and businesses.

The Government should not take the fast growth rate of 2021 for granted. It was a one-off based on removing Covid restrictions and on an unprecedented injection of money by the Treasury and the Bank of England. In the end, they overdid it in scale and duration, triggering a nasty inflation. The new investment has to take place against a less supportive public sector background.

The rise of prices well above wages will cut growth, as people spend more of their money on such basics as food and energy. That will leave them with less to spend on leisure and pleasure – on items that are nice to have. The huge rise in energy bills alongside tax rises including National Insurance will sap spending power further. The economy will slow. The lecture did not tell us how the extra private sector investment will be attracted in these conditions, particularly with the planned rises in Corporation Tax to come.

These troubles will be compounded by the Government’s import promotion policies, which are most pronounced in the Business and Agriculture departments. Business is busy allowing the rundown of big energy using manufacture like steel, ceramics, aluminium, and glass in the name of Net Zero.

The trouble is that we then import the products from abroad, meaning that more C02 is created in their production and transport to us. The Business Department is busy reducing our oil and gas output so that we need to import more energy. Again, this adds to our CO2 production worldwide.The Environment Department is developing big subsidy incentives to remove land from food production and to encourage older farmers to give up. That will make us more dependent on imported food.

So why does the Government not like products made or grown at home? Why doesn’t it want more home output to boost jobs, incomes and lifestyles? Any sensible programme of levelling up should be cutting taxes and making it easier for local businesses and farms to set up and grow.

This year, revenues have come in much higher than the Budget forecast, thanks to higher growth – and way higher than the £12 billion that the Government says it needs for a tax rise. The Treasury did not put up rates of tax, so revenue grew. During the next financial year, higher tax rates and frozen starting levels will hit taxpayers hard. Revenue is likely to underperform as growth stutters.

An energy shortage is a big part of the problem. The government should ease the shortages of gas, oil and electricity. They should invite in the oil and gas producers in the U.K. and help them increase production straight away from current fields. They should offer licences for new production from all those new and extended fields that have already been discovered. That’s more jobs, better paid jobs, and plenty of extra tax revenue. It is also less CO2 generated globally, as our own gas produces under half the CO2 of imported LNG gas. We will have much more productive industry if we have cheap or competitive energy.

The Government should work with the electricity industry to keep the lights on. We  will need more capacity than is planned to cover the electric revolution. We need more power for when the wind does not blow and the sun does not shine. We should abandon the current policy of putting in more and more interconnectors to allow us to import more from an energy short continent.  They should produce schemes to promote more home-grown food.

Elliot’s taste

21 Feb

Like many readers of this site, I’m a Conservative Party member.  Like a smaller number, I’m an Association patron.  Both require giving money.  Requests for more duly follow.

And with good reason. The Party leadership worked out some while ago, roughly during the period when Andrew Feldman was Chairman, that it is hazardous to rely on a few givers of million pound-plus sums. For the donors may decide that they no longer wish to give on that scale.  Or eventually be barred from doing so.

Since declarations under £7500 don’t have to be declared, it’s impossible to know what proportion of any political party’s funds these raise. Though I’ve been told that the amount of money raised by the Conservatives from such gifts have been increasing in recent years.

This humdrum flow of requests for money helps to put yesterday’s Sunday Times splash into perspective.  “Revealed: the wealthy donors with PM’s ear,” it said.  The details were new (in other words, the names of those who attend an “advisory board”).  Its essence was not (the board’s existence was revealed last summer).

The Sunday Times referred to “a leak of several thousand documents”, and presumably there will be more to come in due course.  The paper is not revealing its sources – quite rightly too if it doesn’t wish to – and speculation would lead down a blind ally.

At any rate, the story contains a quote from Mohammed Amerci, a member of this board during the pandemic, who has since fallen out with the Party and is highly critical of the project.  What are the facts?  The starting-point is the existence of forums that allow wealthy donors to meet party politicians.

Labour has the Rose Network Chair Circle, which has invited donors to meet Keir Starmer, details of which are available online. The cost of membership is £5,000 a head per annum.  The Conservatives have the Leader’s Group (£50,000) and the Treasurer’s Group (£25,000)Michael Gove addressed the former last year.

No difference in principle, then.  The advisory board is higher in price (it costs £250,000 a head) and may be different in practice.  It is alleged that members are asked for advice as well as money, but no documentary evidence for the claim was cited; nor is it clear that such requests, if made, are unique to advisory board members.

It was reported that advisory board members lobbied Ministers directly, but it would be surprising if no member of other forums has ever done so, regardless of party.  Certainly, there is nothing new about senior Ministers being asked to attend events to “sing for their supper”.

As I say, the Party’s drive for more small donations puts this push for more large ones in perspective, and three points follow – beside the obvious one that since Labour is in a glass house when it comes to donor clubs, it isn’t well placed to throw stones (and that’s before we get to the turbulent story of the party’s relationship with the unions).

First, the members of the advisory board are unlikely to feel that they’re getting what they want. As I’ve written before, “consider the planned rise in Corporation Tax, the effective re-nationalisation of the railways, and the shift in infrastruscture funding from south to north.”

“Plus net zero, industrial strategy, and the Conservative commitment to spend more, more, more on doctors, teachers and nurses. Much of this goes down well with, say, the CBI but badly with Tory donors, who tend to be blue in tooth and claw”.

Indeed, if advisory board members are hoping for results, there’s scant evidence that they’re getting them.  The Sunday Times report specifically referred to property, construction and big tobacco.  The former is fighting a rearguard action against a Government ambition for a smokefree England by 2030.

As for construction, the irresistible force of the housing lobby is meeting the immovable object of voter resistance. Liberalising planning proposals met mass resistance from the Conservative backbenches – and that was before the Chesham and Amersham by-election.

If my first point is that donors don’t always get their way, my second is that there’s no reason why they shouldn’t – sometimes, even often.  Unfashionable though it may be to say so, the clash of interests in Parliament, and their peaceful resolution through debate, is integral to liberal democracy.

Those Tory forums are part of one of those interests, capital, making its view known to Conservative front benchers. The latter are Ministers because voters made them so, in the near-landslide of the 2019 general election. So far, so good for the advisory board.  But there is a sting in the tail.

Which is that those who give the Party £25 a year, the standard membership fee, have no less an interest in its future than those who give £250,000 a year, the advisory board fee.  This brings me to my third point, which may be less helpful to CCHQ than my first two.

Namely, that we know a bit about what party members think, at least if the ConservativeHome panel is anything to go by. Seven in ten believe that money raised by activists shouldn’t help fund the leader’s private costs (with specific reference to that Downing Street wallpaper). Half want more control of how the money that they raise is spent.

It follows that a big slice of members, if our panel is representative, ask as ConHome has sometimes done: whose party is it anyway?  If an advisory board is to raise six figure sums, should the party leader effectively control how these are spent? And might it not be wiser to declare membership, rather than have it leaked?

At any rate, the trend in recent years has been for the leader to appoint an MP to spearhead campaigning and a friend to raise money.  The latter in Boris Johnson’s case is Ben Elliot, who has got the advisory board up and running.  I suspect our panel’s take is that what it gets up to is fundamentally a matter of taste.

On which point, Elliot will be more aware than anyone else, or at least should be, that Labour has its sights trained on him.  As Andrew Gimson wrote in his profile of the Party Chairman for this site, Elliot would not have arranged the seating plan which seated Robert Jenrick next to Richard Desmond at a party fundraising dinner.

But “because Elliot is in overall charge of CCHQ, he still incurs criticism when things go wrong”, Andrew continued.  “His insouciant manner suggests to those around him a refusal to contemplate the danger of scandal.”  Elliot later apologised to the 1922 Committee Executive.

If taste fails, rules step in: that at any rate is the lesson of the John Major years.  And the more rules there are, the more regulators there are – the Committee on Standards in Public Life, the Electoral Commission, the Independent Adviser on Ministerial Interests, the Parliamentary Commissioner for Standards…

And the more regulators there are, the more power falls into the hands of those we don’t elect rather than those we do.  But if voters don’t like the people they elect to govern them, they don’t seem to care for those they don’t elect, either – at least, not if Brexit is anything to go by.

By the same token, they may not like how the Conservative Party is paid for, but they would like paying for it themselves even less.  And funding Starmer, too.  Not to mention Nicola Sturgeon.  But when private funding becomes tainted as illegitimate, state funding steps in.  Elliot is playing for higher stakes than he may appreciate.

James Roberts: Johnson and Sunak shouldn’t kid themselves. Voters are not impressed by astronomical tax bills.

31 Jan

James Roberts is political director of the TaxPayers’ Alliance.

In their joint piece for yesterday’s Sunday Times, the Prime Minister and Chancellor declared themselves “tax-cutting Conservatives” and simultaneously confirmed that they planned to hike taxes to the highest level since Clement Attlee.

Perhaps this is a reflection of the new political map of Britain. The 2019 general election brought traditional Tory areas and former Labour seats in the “Red Wall” under one roof. Off the back of his promise to “level up” the regions, perhaps Boris Johnson has calculated that this requires greater public investment and Brits can afford higher taxes to pay for it. But nothing could be further from the truth.

Taxpayers, regardless of where they live, don’t want to pay more. As figures released today by the TaxPayers’ Alliance show, the average household can already expect to pay over £1.1 million in tax over their lifetimes. They’ll pay nearly £480,000 in income tax and £190,000 in VAT. Far from being a tax-cutting government, this is one which is seeing typical families across the UK becoming tax millionaires.

This isn’t just a problem for the so-called affluent Tory heartlands. The bottom 20 per cent of earners need to work almost 24 years to pay off their £450,000 tax bill – more than half their working lives. This is the group who will be hit hardest by rising energy prices and the wider cost of living crisis. Many of them will have voted Conservative in 2019 for the first time, for a manifesto which promised not to increase income tax, national insurance, and VAT.

Yet it’s under the Conservatives that we have seen the biggest increases in the lifetime tax burden. It has risen by almost £350,000 for the average household since 2015-16, compared to a rise of £250,000 between 1999-2000 and 2015-16. Since 1977, the amount of tax you’ll pay in your life has doubled in real terms.

And this is all before the impact of the national insurance rise is felt. Add in corporation tax hikes, council tax increases and fiscal drag from frozen income tax thresholds and it means that things will likely get worse. While Johnson and Rishi Sunak have claimed they are low-taxers at heart, ordinary families who are now tax millionaires will find it increasingly difficult to believe.

Politicians are stretching their credibility on tax policy to breaking point. Breaking the pledge on national insurance, to throw money at an unreformed health and social care system, won’t please anyone. Polling from Public First’s James Frayne, columnist for this site, has shown that Conservatives are losing their reputation for keeping taxes low. More working-class voters consider the national insurance rise to be unfair than fair.

And it’s easy to see why. Someone currently earning £15,000 pays £652 of it in national insurance. With the 1.25 percentage point increase this will rise by £68 to £720, an effective rise in how much taxpayers will be paying of more than 10 per cent. So, with a cost of living crisis, the government has decided now is the time to accelerate the tax burden toward a 70-year high and lump low paid workers with an even bigger tax bill.

Despairing Conservatives may well wonder what the alternative could be. How can politicians guarantee investment while keeping their promises of keeping taxes low? Well let’s remember that when it comes to fiscal discipline, there are two sides to the ledger. As the country emerges from Covid, there could not be a more appropriate time for addressing public spending and refocusing funds on areas where they are most needed. Save to spend, if you will.

Much tougher action is needed to root out waste, reform service delivery and get value for taxpayers’ money. Heed Lord Agnew’s call to take waste seriously. Establish a Parliamentary Budget Committee to assess spending before it happens, rather than just hearing in detail afterwards how money was wasted. End national pay bargaining, address excessive public sector pay and – if they insist on working from home – end the London weighting for Whitehall civil servants. Defund the ridiculous schemes and the wasteful quangos, like the Arts Council. Reform pensioner benefits. And yes, properly cut foreign aid. The list goes on.

But don’t pretend raising the lifetime tax bill further is the only option. One sure way for Johnson, or any future leader of the Conservatives, to keep the new Tory coalition together would be to let taxpayers keep more of their own hard-earned money.

Ryan Bourne: For Sunak, cutting the basic rate of income tax shouldn’t be a political priority right now

15 Dec

Ryan Bourne is Chair in Public Understanding of Economics at the Cato Institute.

The tax-to-GDP burden might be rising to its highest level since 1950, but Rishi Sunak, the Chancellor, promises tax cuts soon. Reports say he is planning to cut both inheritance tax and VAT ahead of the next general election. The main “retail” ambition his team wants though is to trim the basic rate of income tax from 20 per cent to 19 per cent in 2023 and then to 18 per cent before polling day.

HM Treasury’s bully pulpit really can be used to set the field for spending or tax battles, but Labour evidently fancies its chances on this turf. Rachel Reeves, the Shadow Chancellor, has already called Sunak’s bluff, telling City AM that she “would like to see the chancellor do it” rather than “just talk, talk, talk” about it. Labour might have spent a decade moaning about underfunded public services due to “austerity,” but it senses backbench Tory unease on tax and will seek to exploit that weakness by ramping up this arms race.

But this raises the question: does the political consensus for a basic rate income tax cut represent good policy sense?

I broadly subscribe to Milton Friedman’s dictum to “favour…cutting taxes under any circumstances and for any excuse, for any reason, whenever it’s possible.” There are all sorts of weird asymmetries in the UK discourse that means it’s easier politically to raise spending rather than cut taxes, so small staters should usually grasp what they can. And yet, for both economic and political reasons, cutting the basic rate of income tax wouldn’t be high on my priority list of tax cuts right now.

First, because it’s a tax cut for over 31.6 million people, reducing the basic income tax rate from 20 to 18 per cent is a big chunk of foregone annual revenue: £11.5 billion, according to HMRC’s ready reckoners. That’s a lot of moola to tell the 27 million basic rate payers that their marginal rate will fall by just two percentage points, which not only doesn’t sound a lot but would not substantively change their incentive to work or earn more income.

And there’s a serious, serious opportunity cost here. For an equivalent revenue, the Chancellor could cancel his planned rise in the main rate of corporation tax to 25 per cent, instead keeping it at just 21 per cent. He could slash stamp duty land tax across the board en route to potentially eliminating the tax entirely. Alternatively, the Conservatives could achieve what their 2019 manifesto’s “ultimate ambition”: raising the employee starting threshold for National Insurance contributions to align it with the income tax personal allowance (perhaps as a step towards integrating the two taxes). That would be a tax cut better targeted at low earners, with bigger pro-work incentive effects across low levels of income.

That brings us to the second, more political, reason why a basic rate cut would be a weird priority in this Parliament. Sunak’s recently announced “health and social care levy” – a 1.25 percentage point increase in National Insurance taxes that will eventually become its own earnings tax – would raise very similar sums to that lost from these income tax cuts. Not only would the Government have used the need for better public services as justification to raise taxes substantially only to then cut them by around the same amount. But in doing so, it would fall prey to criticism of generating unfairness given the two different tax bases.

The IFS’s Paul Johnson, for example, has described raising National Insurance to fund the NHS while then cutting the basic rate of income tax as “indefensible.” Why? Well, because the health and social care levy would only squeeze workers, whereas the income tax cut would benefit many other people earning incomes from holding assets, such as landlords or recipients of occupational pensions. That makes the Tories vulnerable to the accusation that, combined, these measures redistribute from poorer labourers to the wealthy.

Now Sunak might not be too bothered by this attack. Polling data regularly shows the more salient income tax second only to inheritance tax in the list of levies the public hate. It’s clear that the creation of the health and social care levy was more about delivering a flowery sounding revenue stream that it would be politically easier to raise in the longer-term anyway. And left-wingers will always call every income tax cut regressive, dreaming up new dodgy statistics to prove it.

But even if the Chancellor is confident on the politics, there’s another reason for caution on the economics. For when you feel you have the political and economic space to actually engage in a major tax cut, you should seek to achieve the biggest bang for your buck. And I’ve always been struck by an old line from a ConHome piece by Matt Sinclair on this, which said “tax cuts without reform is a missed opportunity.”

Britain’s tax code remains a complete mess, with extremely high marginal tax rates littered through the code for income. We have business rates, investment incentives, vehicle taxation, and the VAT system all in need of a complete rethink, or at the very least being rationalised to eliminate absurd anomalies. Add to this the slow economic growth we’ve experienced since the Great Recession and Britain is crying out for meaningful tax reform to improve incentives to work, save, and invest, and to remove tax-induced distortions to economic activity.

With all these challenges, it would seem short-sighted not to use a large tax cut to at least aid the process of some lasting, meaningful pro-growth reform. Big tax cuts of 10s of billions of pounds can play a crucial role in greasing the wheels for controversial tax changes, in fact, because any losers from a revenue-neutral reform can then be bought off through a lower overall burden.

If the Chancellor is really determined to do a large, broad-based pre-election tax cut, his ambitions should therefore not be limited to a simple rate reduction. He might prioritise a big rise in the starting national insurance threshold or to cut the headline VAT rate while phasing out many zero- or reduced ratings. Both would still be large tax cuts for most households, buy they’d bring a double dividend: either substantively improving work incentives for those on very low incomes, or improving the coherence of the code too.

With an ageing population raising demand for government spending, political opportunities for major tax cuts seem to be getting scarcer. That increases the importance of using them prudently. Sunak’s aim should be to use any cuts to improve our lasting economic potential and not just put more cash in pockets before elections.

Tom Clougherty: Tax rises will trash the UK’s international competitiveness. But there is a better way.

22 Oct

Tom Clougherty is head of tax and editorial director at the Centre for Policy Studies.

Unless the Government changes course, Britain’s international tax competitiveness is going to plummet in 2023, with coming tax increases set to leave us with one of the least growth-friendly tax systems of any rich nation.

That’s the key finding of a new analysis by the Centre for Policy Studies and Tax Foundation think tanks, based on the latter’s 2021 International Tax Competitiveness Index, which was released earlier this week.

The UK comes 22nd on the latest edition of the Index, just behind Canada (20th) and the United States (21st). We have the best cross-border tax rules of any OECD nation, but do not fare so well domestically: finishing 18th for corporation taxes, 22nd for VAT, 23rd for individual taxes, and 33rd for property taxes.

For now, that ranking is actually slightly unfair to the UK: because of a data lag, this year’s Index does not reflect the impact of the temporary super-deduction for capital investment, which Rishi Sunak announced at his March budget.

The super-deduction addresses a long-standing weakness of the UK tax system – our unusually stingy treatment of business investment – and therefore represents a bold, pro-growth move. If we factor it into the International Tax Competitiveness Index, the UK’s corporate tax rank improves from 18th to 11th and its overall rank from 22nd to 21st.

The problem, of course, is that the super-deduction is only temporary. So while it might encourage firms to bring forward existing investment plans, it is not likely to sustainably boost investment in the longer-run – which ought to be the goal of a truly effective tax reform.

And, sadly, the positive impact of the super-deduction on Britain’s tax competitiveness looks set to be equally short-lived. With higher marginal tax rates due to hit personal incomes in April 2022, and corporate incomes in 2023, the country is approaching a competitiveness cliff-edge. The outlook is not at all promising.

First, the attractiveness of our individual tax system will decline as the ‘health and social care levy’ is introduced. This will increase the top tax rate on earnings to 48.25 per cent, compared with a current OECD average of 42.7 per cent. For dividends, the top rate will rise to 39.25 per cent – the fourth-highest in the OECD, and well above the 24.1 per cent average rate. The UK would fall from 23rd to 31st on the International Tax Competitiveness Index’s ranking of personal tax regimes.

Worse is to come a year later, when the expiry of the super-deduction will be accompanied by a big increase in the headline corporation tax rate, from 19 to 25 per cent. The combined effect of this change will be to send the UK plunging down the tax competitiveness rankings: its corporate tax rank will fall from 11th to 31st out of 37 OECD countries, and it will slide to 30th place in the International Tax Competitiveness Index overall.

This prospect represents a step-change in the UK’s attractiveness to internationally-mobile business and investment. Coming in the wake of Brexit and a deep, pandemic-induced recession, when generating robust economic growth should be at the forefront of every policymaker’s mind, this development ought to be of grave concern to anyone who cares about the prospects of the British economy.

As for the Government, it will struggle to deliver any part of its agenda, whether it’s rising real wages, better public services, or sound public finances – not to mention longer-term goals like levelling up or the transition to Net Zero – if the private-sector economy does not grow strongly in the years ahead. Trashing the country’s tax competitiveness will make that ambition much harder to achieve than it needs to be.

What, then, should we do instead? Nice as it would be, given that tax revenues are forecast to reach their highest sustained level since the aftermath of the second world war, boosting the UK’s tax competitiveness doesn’t necessarily mean cutting the overall tax burden. Famously high-tax Sweden finishes 8th on the International Tax Competitiveness Index – well above the UK – while perennial chart-topper Estonia actually manages to raise an almost identical share of GDP from its tax system as we do.

Rather, the emphasis needs to be on reform – identifying the bits of our tax system that weigh heavily on growth and doing what we can to change them. On corporation tax, that means making the current approach to capital investment permanent, while maintaining a competitive headline tax rate. For individuals, we should rethink the highest ‘additional rate’ of tax, which raises little (if any) money anyway. Property taxes, meanwhile, need a total overhaul – beginning with economically disastrous business rates and stamp duties.

Developing an internationally competitive tax system is one of the key ways the Government can help the UK to attract more business and investment, spur domestic enterprise and entrepreneurship, and generally encourage a dynamic and growing economy. A powerful pro-growth tax agenda is well-within our grasp. We just need the Government to change course before it’s too late. Next week’s budget is the perfect time to start.

David Gauke: Sunak’s options for a Budget windfall. Lower debt, tax cuts and higher spending. Which will he choose?

27 Sep

David Gauke is a former Justice Secretary, and was an independent candidate in South-West Hertfordshire at the recent general election.

In a month’s time, Rishi Sunak will have some good news to deliver in his Budget. He will have more money to play with than was forecast at the time of the last as forecast by the Office for Budget Responsibility. How he uses these additional resources will tell us a great deal about his priorities and the priorities of the Government.

Before turning to his options, it is worth setting out some context. The overall state of the public finances cannot be described as being particularly cheery, even if they are significantly improved since March.

The debt to GDP ratio will still be nearly 100 per cent, higher than at any point since the early 1960s, and not forecast to fall fast. The Government still has substantial spending pressures in the short and medium term – Covid catch-up, levelling up, net zero and social care – as well as long term demographic pressures that will bite in the 2030s. In response, the Government has this year announced substantial tax increases with the Corporation Tax rise, a freeze on thresholds and allowances in the personal tax system and the National Insurance increase announced earlier in the month. We now have the highest tax burden in our peacetime history.

The tax rises have not taken effect yet, but many people are already facing a squeeze in living standards. Inflation is set to hit four per cent, with energy prices rising much faster than that and six million people are about to see the end of the £20 per week Universal Credit uplift.

So at a time of high debt, high taxes, falling living standards and unfunded spending commitments, a bit of good news does not come amiss.

The good news is that the OBR’s March assessments of GDP growth in 2021 (4 per cent) and of the long term scarring effect of Covid on the economy (or, to put it another away, the capacity for the UK economy to grow in future) of three per cent looks to be pessimistic. With GDP growth this year likely to be approximately seven per cent (although the current supply chain uncertainties may bring it down a little) and scarring as little as one per cent, the difference to the public finances could be low tens of billions – a very handy sum.

Assuming that this is the case, what are Rishi Sunak’s options?

First, he can strengthen the public finances by bringing debt down faster than originally planned. We are getting our debt away cheaply at the moment which, some argue, suggests that there is not an imperative to do make a further reduction. But our debt levels are uncomfortably high in the event of another recession, and even small increases in interest rates could result in us paying a lot more to service our debt. Maintaining market credibility is always important to the Treasury and, by all accounts, the Chancellor of the Exchequer. We can assume that he will be keen to ensure that a significant proportion of the improvement in the public finances is put to this purpose. It also means that the Government may have more choices available nearer the time of the general election.

Second, taxes could be cut. This seems very unlikely to be announced in October ,given that the Prime Minister has just announced some tax rises, there remain outstanding spending pressures and it is still relatively early in the electoral cycle. Many Conservative MPs are not happy with the historically high level of taxes, but that is not going to change any time soon.

Third, he could increase departmental spending. The Treasury is downplaying the chances of this option by stating that the spending envelope has been set and is not going to be re-opened, but I am somewhat sceptical that this is quite so hard and fast a position.

There are two conflicting views on the pressures on departmental spending. One view is that the current spending plans assume no Covid costs after 2021-22 which is unrealistic; that generous spending plans for health, education and defence mean that there is precious little left for other departments – to the extent that unprotected departments face a real terms reduction and, if you compare the departmental spending numbers with what was announced in March 2020, there has been a cut.

The alternative argument put forward by the Treasury spending hawks is to point out the extent to which March 2020 signalled a turning-on of the spending taps. The long term trend growth of our economy is forecast to be 1.5 per cent. If departmental spending is to remain constant as a share of GDP, it would also grow at 1.5 per cent but, instead, the plans involved increases of four per cent a year and the capital spending element by seveb per cent a year.

The Treasury gets very annoyed at any suggestion made by the good people at the Institute of Fiscal Studies that there are departmental ‘cuts’ because the current spending plans are lower than those announced in March 2020. It is reminiscent of the trick Gordon Brown used to pull of setting out steep increases in public spending and, when the Conservatives set out slightly shallower increases in spending but increases nonetheless, describing the differences in spending as ‘Tory cuts’.

The bigger point the Treasury will be making is that, for those departments that have much more to spend, they really should absorb the short-term Covid recovery costs because spending is going up fast enough as it is, thank you very much.

(And, by the way, given that we are giving you this extra money, how about some proper efficiency reforms in return? Spending reviews should be the moment when the Treasury and spending departments make some big strategic decisions as to how taxpayer value for money is achieved but, since the Prime Minister has just reshuffled many spending ministers and the Chief Secretary to the Treasury, such a development does not seem likely on this occasion.)

The real issue is the position with the unprotected departments. There is a political vulnerability if departments do, in fact, see real term cuts (“the return to austerity”). With regard to two departments of which I have experience, the Ministry of Justice clearly needs more resources to function effectively and, in terms of protecting the public finances, penny-pinching with HMRC is counter-productive. My guess is that, with the exception of overseas aid, the Chancellor at the very least will find the resources to ensure no department faces real term cuts.

The final choice is on welfare. The £20 per week Universal Credit uplift will have gone by the time we get to 27 October and, particularly at a time of rising prices, this is going to be painful for many. Lowering the taper rate will not help the poorest claimants, but it is consistent with the Government’s emphasis on incentivising work by essentially lowering the marginal tax rate. It would also provide a reasonably good answer to what the Government is doing to help people with the squeeze on living standards. Taken in the round, a reduction in the taper rate ticks so many boxes that I would be surprised if it does not happen.

So the Chancellor should have some positive announcements on borrowing, departmental spending and Universal Credit. In what may prove to be a difficult autumn for the Government, Sunak’s October Budget looks likely to be one of its better moments.

David Gauke: There are signs that the Treasury is winning. And that more tax rises are coming.

19 Jul

David Gauke is a former Justice Secretary, and was an independent candidate in South-West Hertfordshire at the 2019 general election.

When asked about the proposal by Henry Dimbleby that a new Salt and Sugar Reformulation Tax should be introduced, the Prime Minister responded by saying that he is ‘not attracted to extra taxes on hard working people’.

At one level, this is what one might expect him to say, given his reluctance to be the bearer of bad news. But some have taken this to be not just a holding response to the publication of the National Food Strategy, but a firm determination to hold the line against tax rises. If so, there may be problems ahead.

It was only a few months ago that Rishi Sunak delivered a tax-raising Budget, with the freezing of allowances and thresholds in the personal tax system, plus a hefty increase in the rate of Corporation Tax (which, in the end, will be paid by people because all taxes are). These increases may well be sufficient to meet the Chancellor’s fiscal rules ,but only if he maintains the current spending plans.

This looks unlikely. To take just three examples, the cost of Covid catch-up, social care reform and net zero could easily cost £10 billion a year a piece. Add to that the cost of levelling up, plus the risks that debt interest payments could increase significantly, the Chancellor’s target of current expenditure being paid for by current revenue and debt falling as a proportion of GDP looks precarious.

It would be fair to say that the cause of spending control has been strengthened in recent days. The Government saw off attempts to block the cut in overseas aid more comfortably than expected, with Sunak very heavily involved in talking round potential rebels.

The temporary uplift in Universal Credit is looking like it will indeed be temporary (although this is likely to store up problems, I suspect) and the Chancellor has – to all intents and purposes – ruled out a huge increase in the state pension, which would happen if the triple lock was applied in the normal manner. On the latter point, this is entirely sensible and has been met with little opposition.

A month ago, there were complaints from the Treasury that the Prime Minister was going around making unfunded spending commitments but Boris Johnson appears to have been reined in. Big promises on climate change seem to have been deferred to the autumn, and a supposedly big speech on levelling up involved a spending commitment of just £50 milliom. Whereas most observers considered the Coventry address to be one of the least impressive set-piece Prime Ministerial speeches ever delivered, the Treasury would have considered it a triumph.

An announcement on social care reform is imminent, but this does look like it may be properly funded by additional taxes, suggesting that ‘not attracted to extra taxes’ does not mean ‘no extra taxes’ after all. It is reported that it is the Chancellor who is sceptical about the proposed policy, although I suspect this is driven by Treasury doubts about pursuing a Dilnot-style cap on social care costs (which benefits those with the largest estates most), rather than by an objection to the principle that new spending commitments have to be paid for.

For the first time in a while, the cause of fiscal conservatism – ensuring that public finances are sustainable – is gaining the upper hand. There are two reasons for this.

First, the Chesham & Amersham by-election has caused some nervousness. The fear within Government is that high spending is all very well, but a section of the Conservative voting electorate will draw the conclusion that they are the ones who will have to pay for it. It was striking that the Prime Minister spent much of his levelling-up speech saying that he does not want to make rich places poorer, which may come as a disappointment to parts of the Red Wall, but is clearly designed to reassure the South East.

The second reason why a more cautious approach to the public finances might be pursued is the apparent return of inflation. This may be transitory as we return to some kind of normality, and adjust to Brexit frictions and labour shortages, but it may not be. If it results in higher interest rates, the costs for the exchequer in funding our debt could rise very quickly – as the Office for Budget Responsibility has pointed out. An increase in interest rates of one per cent would add £21 billion to our debt interest bill. If our fiscal policy is considered to lack credibility, our problems could be worse.

There remains, however, the question of how the Conservative Party maintains the support of the new supporters it gained in 2019, whose views on tax and spend are much closer to those of the Labour Party than the traditional Conservatives. On spending on public services in general ,plus investment in their localities, they will want to see evidence of delivery.

Boris Johnson will be given the benefit of the doubt and, I suspect, be able to retain most of the Red Wall at the next general election but the pressure to spend money – not least from Red Wall MPs – will be considerable. The Treasury has won a few battles of late, but with a Prime Minister prone to change direction like a shopping trolley (as one prominent Westminster pundit likes to put it), he may be on the other side of the aisle before long.

There is also another reason for raising taxes, as well as funding public services. Tax can be used as a lever to change behaviour. The Prime Minister has declared that he is on a mission to reduce obesity, and it is hard to see how this could be done without using tax to change behaviour.

Ultimately, this may not mean consumers paying much of a price because producers reformulate their products (as happened with the Soft Drink Industry Levy) in order to prevent consumers facing higher prices. It was an effective way of using the price mechanism to achieve a Government objective, but it did mean legislating for a new tax.

A similar argument can be made for using taxes to help achieve net zero. If we want people to consume less carbon, the most efficient way to do this is to ensure that the cost of carbon is incorporated into the price of products by using a carbon tax. (By the way, those of us who value markets as a means of allocating resources should be instinctively more sympathetic to meeting environmental objectives by using the price mechanism where possible, rather than through regulation which can be cumbersome and ill-targeted.)

In both cases, tax increases, as a behavioural stick, may be required. They are also likely to be regressive, which may mean compensating mechanisms of some description which – in turn – will need to be paid for.

All of this means that extra taxes on hard working people may be necessary to deliver sound public finances and to meet other Government objectives, however unattractive the Prime Minister considers them to be.

David Green: Wealth extraction, not wealth creation. The Morrisons takeoever – and why government should be prepared to intervene.

11 Jul

David Green is Director of Civitas.

The Government is in a philosophical quandary. Its commitment to levelling up implies economic interventions in favour of left-behind regions. As a result, it has been attacked for abandoning the ideal of low taxes and small government. Simultaneously, it is pursuing some policies that imply continued commitment to the principle of non-interference in economic policy – not least in its approach to takeovers of British companies by private equity, brought to a head recently by offers to buy Morrisons.

The paradox was particularly striking when Kwasi Kwarteng announced new subsidy rules under the Subsidy Control Bill. He felt bound to say that the Government was not returning to the industrial strategy of the 1970s. There would be no ‘picking winners’ or bailing out of unsustainable companies. Producers will be backed only if they have good prospects of success and especially if they are supportive of decarbonisation. An innocent observer might conclude that a policy of avoiding lame ducks and backing promising ‘green’ technologies was picking winners.

The Government appears to have no clear criterion to help it distinguish between policies compatible with personal freedom and those that undermine it. Fortunately, one of the greatest defenders of liberty in the last 100 years grappled with this very problem.

Hayek argued that the main criterion was the rule of law, by which he meant that the Government should act through general laws that applied equally to all, including itself, and specifically that it should not grant preferential treatment to specific people. To do so would undermine the process of competitive discovery by which we reveal better ways of meeting human requirements.

What would this criterion imply for decarbonisation policy? It suggests not pre-judging which producers or technologies will be preferred. In vehicles, for example, there may be a role for hydrogen, hybrids, diesel, petrol, or all-electric. We should allow the competitive system to reveal the best approaches through trial and error.

But what should the Government do about private equity taking over British companies. Must it be accepted as an inevitable consequence of a free market and its ruling doctrine of non-interference?

Again, Hayek thought it through. It was the character of government activity that was important, he said, not the volume. Many measures were compatible with freedom. Moreover, he thought that a government that was ‘comparatively inactive but does the wrong things’ could do much more to ‘cripple the forces of  a market economy’ than one that is active, but confines itself to measures that assist ‘the spontaneous forces of the economy’.

How should this reasoning be applied today? The Morrisons takeover has come under strong fire from others in the financial sector. Legal and General, the City’s biggest fund manager, cautioned against loading Morrisons with debt and selling off its property assets on the cheap. Andrew Koch, a senior fund manager, feared that this strategy would lead to reduced tax paid to the Exchequer (because debt interest is deducted from profits).

Concerns in the City have been multiplied by the experience of Cobham, the defence group, which was sold to American private equity owners about two years ago. At the time, many warned that the new owners would break up the company, but the Johnson Government authorised the deal after getting some promises. Today, more than half of the business by value has been sold. James Anderson of Baillie Gifford, one of the world’s most successful investors, has recently described the underlying problem as a ‘deep sickness’ in UK capital markets.

The claims of these critics is consistent with the thinking of Adam Smith who warned against misplaced trust in manufacturers, speculators and merchants. They were ‘an order of men, whose interest is never exactly the same with that of the publick, who have generally an interest to deceive and even to oppress the publick, and who accordingly have, upon many occasions, both deceived and oppressed it’.

The Government should not fall into the trap of thinking that it should never intervene in corporate takeovers. There is a public interest in stopping the Morrisons takeover. The company’s model is to own the vast majority of its shops and run some its own manufacturers and farms. It is profitable. Private equity has been granted preferential advantages. Owners are allowed to pay tax as if they make capital gains and not profits subject to higher corporation tax. And owners are able to take advantage of the preferential treatment given to company debt compared with equity. A government that used its powers to encourage Hayek’s ‘spontaneous forces’ would equalise the treatment of debt and equity to preserve responsible private ownership.

If the Morrisons bid is allowed to proceed the owners will probably sell off the shops to another company they control and lease them back, giving them a capital gain and an income stream at the expense of Morrisons. This is wealth extraction not wealth creation. If the Government allows its squeamishness towards intervention to paralyse it into inaction, it will drop helplessly into the trap described by Hayek: that of crippling the spontaneous forces of a market economy by inaction.