Taxpayers deserve more honesty on fiscal policy

December 11, 2014 3:58 PM

Political parties are talking about the "tough decisions" they'd take to reduce spending. But they're all being very light on detail. Tax proposals, however, are much clearer.

The only problem is that many of them are misguided. Labour want to introduce a Mansion Tax, while the Coalition Government has implemented huge hikes in Stamp Duty at the top end of the market. But the consensus that property is under-taxed is wrong. Property taxes in the UK are already by far the highest in the developed world. Labour has also proposed increasing Corporation Tax and cutting tax relief on pensions. It also recommended an arbitrary confiscation of money from tobacco companies - and again, this is something the Coalition Government promised to review at the Autumn Statement.

Labour will also implement a “clampdown” on tax avoidance and a new tax for people employed by companies the party think the public don’t like very much - banks.

On top of this, Ed Balls has talked about lifting the additional rate of Income Tax from 45p to 50p. He has said this would raise £3 billion but frankly, this figure is a nonsense. Even former Labour Cabinet ministers agree.

HMRC publishes a simple list of its estimates of “the effects of illustrative tax changes on tax receipts” each year.

In 2015-16, they estimate that a 1p increase in the additional rate would yield an extra £75 million for the exchequer. That’s just going from 45p to 46p through - the additional yield from each percentage point increase would be less than the previous one. Even assuming that every percentage point increase raised the same amount, HMRC’s estimate would be £375 million – just one eighth of Labour’s.

The Institute for Fiscal Studies has also looked at the revenue raising potential of the 50p rate in considerable detail and their conclusions, based on the best evidence available, is that “raising the top rate of tax would raise little revenue and make, at best, a marginal contribution to reducing the budget deficit an incoming government would face after the next election.”

Labour’s numbers are based on a 2012 report by HMRC looking at the exchequer cost of of cutting the 50p rate to 45p. They have wilfully ignored the behavioural impact which reduced the static cost  by over 97 per cent. Given that Ed Balls has already said that the 50p rate will be temporary, there’s no reason to believe the behavioural impact would be significantly different this time around.  He’s also failed to mention that the same report conceded that it was “quite possible” that the 50p rate lost the exchequer money."

This is exactly why any government should use dynamic modelling to cost all fiscal policy decisions.  At the 2013 Autumn Statement, the Coalition Government published modelling of the dynamic effects of their corporation tax cuts, demonstrating how they will increase long-term GDP by around 0.7 per cent in turn leading to higher revenues. Regrettably, besides some work on Fuel Duty, little more has been done since.

But at least parties are a more forthright about the tax changes they'd make than they are about spending reductions. Every party is guilty of not being open about what specific savings they are going to make. Far from making difficult decisions, the Coalition Government has for the most part failed to make the easy ones. Massively increasing the international aid budget, going ahead with HS2 and dishing out universal cash benefits to high turnout voters are not the actions of a government making “tough decisions.”

Taxpayers deserve more honesty than they're currently getting.

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