Points to consider when evaluating the details of the parties’ tax cut plans

November 10, 2008 12:11 PM

We must wait to see the details to discover exactly how good the different parties' tax cut proposals are. There are a number of ways in which the plans can vary:


1) Targeting. Are we talking about tax cuts across the board, or cuts aimed at particular activities or groups? As a rule, lower taxation on any sector or group will be a relief to those who benefit and a boost to the economy as a whole. There are, however, particular cuts that can be particularly beneficial. Raising the threshold for paying income tax, for example, will help the poorest, who find themselves with the tightest budgetary constraints and are also maybe more likely to spend the extra money on the high street, providing a wider economic shot in the arm.  Reducing income tax rates would also give a boost. 


2) Funding. On what basis will tax cuts be provided? The Government has for years been wedded to borrowing to fund its projects, and seems to be bringing that approach to this new challenge. The Tories, on the other hand, have said that their cuts will be "fully funded" - meaning either higher taxes on the rich or cuts in public spending. Of the three options - borrowing, taxing some more or reining in spending - only the latter is either palatable or sensible. The public debt is already vast, and having borrowed our way into a crisis there is no sense in trying to borrow our way out of it on the basis of jam today, higher taxes tomorrow. Increasing tax on business or wealthy individuals would also be deeply unwise. For a start, many businesses and individuals are struggling already and higher tax will simply drive them under or abroad. It is clearly high public spending which needs to be reined in to provide these tax cuts. Regional Development Agencies, for example, spend £2.3 billion a year, sufficient to cut Small Business Corporation Tax by 4p.


3) Short term and long term tax cuts. Whilst the parties all now seem to recognise the need for short term tax cuts to fight the recession, it is also important that we have a low tax economy in the medium and long term. We don't just need to ride out the immediate crisis, we will need to rebuild the economy and retain a competitive edge as things start to grow again. With so many businesses considering relocating, Britain needs low taxes to attract them so we can all enjoy the benefit.


There are some voices still criticising the idea of tax cuts, of course, but their arguments have lost any sting they might once have had. The only cogent objection is the notion that cutting taxes does not necessarily get money back on the High Street. Won't people just put the money away in savings or use it to pay off personal debt? Well yes, possibly, but both of those are good things in themselves. EIther you have a more secure feeling for the populace and improved balance sheets for the struggling banks, or you have a reduction in the personal debt problem. There's a lot of evidence that suggests this money will end up circulating in the economy, but if the worst case scenario is saving and paying off debts then it's not really a worst case scenario at all. Either way, tax cuts will help hugely.

We must wait to see the details to discover exactly how good the different parties' tax cut proposals are. There are a number of ways in which the plans can vary:


1) Targeting. Are we talking about tax cuts across the board, or cuts aimed at particular activities or groups? As a rule, lower taxation on any sector or group will be a relief to those who benefit and a boost to the economy as a whole. There are, however, particular cuts that can be particularly beneficial. Raising the threshold for paying income tax, for example, will help the poorest, who find themselves with the tightest budgetary constraints and are also maybe more likely to spend the extra money on the high street, providing a wider economic shot in the arm.  Reducing income tax rates would also give a boost. 


2) Funding. On what basis will tax cuts be provided? The Government has for years been wedded to borrowing to fund its projects, and seems to be bringing that approach to this new challenge. The Tories, on the other hand, have said that their cuts will be "fully funded" - meaning either higher taxes on the rich or cuts in public spending. Of the three options - borrowing, taxing some more or reining in spending - only the latter is either palatable or sensible. The public debt is already vast, and having borrowed our way into a crisis there is no sense in trying to borrow our way out of it on the basis of jam today, higher taxes tomorrow. Increasing tax on business or wealthy individuals would also be deeply unwise. For a start, many businesses and individuals are struggling already and higher tax will simply drive them under or abroad. It is clearly high public spending which needs to be reined in to provide these tax cuts. Regional Development Agencies, for example, spend £2.3 billion a year, sufficient to cut Small Business Corporation Tax by 4p.


3) Short term and long term tax cuts. Whilst the parties all now seem to recognise the need for short term tax cuts to fight the recession, it is also important that we have a low tax economy in the medium and long term. We don't just need to ride out the immediate crisis, we will need to rebuild the economy and retain a competitive edge as things start to grow again. With so many businesses considering relocating, Britain needs low taxes to attract them so we can all enjoy the benefit.


There are some voices still criticising the idea of tax cuts, of course, but their arguments have lost any sting they might once have had. The only cogent objection is the notion that cutting taxes does not necessarily get money back on the High Street. Won't people just put the money away in savings or use it to pay off personal debt? Well yes, possibly, but both of those are good things in themselves. EIther you have a more secure feeling for the populace and improved balance sheets for the struggling banks, or you have a reduction in the personal debt problem. There's a lot of evidence that suggests this money will end up circulating in the economy, but if the worst case scenario is saving and paying off debts then it's not really a worst case scenario at all. Either way, tax cuts will help hugely.

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