Feb 2011 07

Last week, there were suggestions that George Osborne was preparing the ground for tax cuts in March’s budget. David Cameron put paid to that yesterday in an interview in the Sunday Telegraph:

“when you’re borrowing 11% of your GDP, it’s not possible to make significant net tax cuts. It just isn’t. It’s no good saying we’re going to deal with the deficit by cutting spending, but then we’re going to make things worse again by cutting taxes. I’m afraid it doesn’t add up.”

So no joy, then. A VAT hike, fuel duty increases and 750,000 taxpayers being pulled into the higher rate tax band mean that the cost of living for millions of families is sky-high, and getting higher. Many areas of spending are being increased; the Department for International Development’s budget will be increased by £3.7 billion by the end of the Parliament. The bonfire of the quangos mysteriously morphed from a cost cutting exercise into an accountability measure, so there is plenty of fat left to trim in that sector. Huge and wildly expensive projects like High Speed Rail have been proposed with flawed business cases. More can be done to cut back spending meaning, as Matthew Sinclair pointed out on The Daily Politics last week, there absolutely are opportunities to make welcome tax cuts to reduce the burden on taxpayers:

Calculations from the Centre of Economics and Business Research suggest that the 50p rate will lose money yet it’s being kept for political expediency. The media last week pitched scrapping the 50p rate against raising the lower threshold as a direct choice, one or the other, rich or poor. But if the 50p rate loses the Treasury money and they want to plug the gap, how will it do this? Ordinary families will be taxed more. The Government seems to be reluctant to articulate coherent arguments against the 50p rate, in case they are rounded on by the media, unions and a whole host of interest groups as friends of the rich. But if they told families across Britain that the 50p rate would lose money, and they’d be paying more tax just to have it, then taxpayers might think twice.

Without the Government presenting any dynamic analysis, these kinds of dichotomies presented by the media will continue to hinder debate. We’d love to see the lower threshold significantly increased; we’ve consistently called for it and it’s part of our Manifesto. Reducing the tax burden on low income families – and in some cases taking people out of tax altogether – will also increase the incentive to work. But to mitigate for this, the IFS say that a further 850,000 people would be brought into the higher rate bracket by 2015–16 if the government manages to achieve a £10,000 allowance by then. Most of these people will not be rich by any means, but their cost of living will go up, especially if the VAT increase is maintained, air passenger duty is increased and fuel duty remains obscenely high. In our report on entrepreneurship we set out how high the combined marginal tax rates on income earned, saved, invested in a company and passed on to children is: as high as 92 per cent with the new 50p top tax rate. The big rewards that make entrepreneurship, and the associated risks, worthwhile are hit particularly hard by the tax system. Small businesses tend to create the most new jobs too. But all the public are presented with is two stark but wholly misleading choices: tax the rich or tax the poor.

In the Government’s defence, the current system is a complete mess. If you started from scratch, not a single person would concoct what we have now. It’s a system that has evolved and developed, being added to annually with Finance Acts. No one planned this to be the finishing point of the tax system, and it’s certainly not the path to a simpler one. This makes governments’ decisions going in to Budgets fiendishly difficult, and worse, it makes tax decisions political and not economic, helping certain groups or raising revenue depending on what is politically sell-able. It’s the same this year: George Osborne has a false choice of taxing the rich or taxing the poor.

The system can’t be fixed in a day, and that’s why the 2020 Tax Commission will be working hard throughout the year to work out what the solution could be.

John is the Director of the TaxPayers’ Alliance, overseeing the work of the research, grassroots, campaign and media teams

  • Steve Collins

    Oh yes there is room for tax cuts, but not the ones that most of us would like to see. Instead it looks like we’re getting a double whammy of reduced revenue for the Exchequer and increased offshoring of jobs. Nice.

    The TPA must love it.


  • Cuffleyburgers

    Tax cuts could be paid for by deregulation and leaving the EU

  • H M

    Rather than moving immediately to cut the 50% rate – given the political difficulties you identify – would it not make more sense to tackle the clawback of the personal allowance at £100,000 which currently creates a 60% marginal rate for some taxpayers and which hardly anyone understands?

  • Anon.

    It is a well known phenomenon that when taxes are cut the “take” for said tax often increases dramatically.

    Higher taxes dramatically reduce the “proportional cost” of accounting to avoid or reduces ones tax payments.

    Higher Taxes incentivise tax avoidance. As an Economics student I find the coalition’s plans to cut the deficit mind-boggling to say the least. I am a right of centre, libertarian and free-market advocate, but the Coalition are going to do more damage long term with their dalliance and “populist but-wont-solve-the-problem” policymaking.

  • SnoddersB

    Time to leave the EU, an organisation which is cutting nothing and continues to demand more money. Just that action alone would allow either the paying off of the Labour debt or a reduction in tax.