Taxation truths

 

In  the 22^nd June this year the Observer published an article by Will Hutton containing some useful facts and perspective on taxation in the UK.  This is a summary (published without his permission, but I hope he won’t mind. I have tried to put information from the article in bold type, and my own minor interpolations in ordinary type.)

1.Next year (2026) the UK’s tax take  as a share of GDP will rise to its highest level  in 70 years.   The right-wing press  will have a field-day flaunting this as speculation in the next few months continues about  almost inevitable need to increase the present level.  This post is written in the hope of encouraging a more informed debate.

2.  However, the UK comes only 8^th in a list of 14 OECD countries  with 35.3%  of GDP taken  in tax.  This is just above the OECD average of 33.9% (and no surprise given the need to repair 14 years of “austerity.") France is top of the list with 43.8%  Finland (the happiest country in the world according to a survey published today) is third with 42.4%, Germany  sixth with 38.1%, the USA 13^th with 25.2% (which, of course, does not include universal health care.)

3.The freezing  of income tax thresholds for nearly all of the 2020s means that the number of higher-rate taxpayers has  already increased by about 40% to some six million, and will climb by the end of the decade to eight million.  Britain  has by default  created a very progressive income tax system.

4.On  the other hand, while wealth as a share of GDP has doubled over the past 40 years,  the proportional revenue from taxes on capital and property has scarcely budged.

4.  The contribution from indirect taxes other than VAT has  halved over the last 30 years.  The freezing of  excise duties on fuel alone has cost a cumulative £30bn fallaway in tax revenues.

5.  According to the IFS, there is no unequivocal relationship  between tax share and good economic performance.  All the Nordic countries have higher tax to GDP ratios,  while poorly performing Colombia and the Czech Republic  have lower ratios.  The US is often cited as  an exemplar of the opposite  but its dynamism has as much to do with its continental economy, pool of scientific research  and deep capital markets. (And, as I hint above, I suspect if the amount US citizens spend on health insurance were included they would move sharply up the table.)

6.  The UK is in fact astonishingly entrepreneurial.    We rank third in the world for the number of startups,  and third in the world for hosting “Unicorns” – fast growing companies valued at more than $1bn.

7. If Britain wants the common good outcomes of functioning public services  and a decent social floor than the money will  have to be found. The task is to find the resources to deliver what we know we need  and work out a fair  means of raising tax  that doesn’t deliver perverse outcomes.

8.  Hutton has reservations about a wealth tax, as I do.  It is too difficult to calculate and too easy to avoid.  Well designed council, inheritance and capital gains tax are surer mechanisms.

9. Over a five or 10 year period a system [of council tax] based on today’s values and with wider bands must be phased in.

10.  Fuel duty now only represents 1% of GDP and should be restored to 2%.  As electrically driven vehicles become the norm we need to move to systems of road usage  pricing.

11.  Together reformed car and council tax could yield as much as £50bn, enough not only to help our strained public services but to unfreeze those income tax personal allowances.

12.Hutton reminds us of the famous dictum of Oliver Wendell Holmes Jr that “taxes are the price we pay for a civilised society.”

A Bitterly Disappointing Year

 

During my week’s holiday (walking in Conwy with an Anglo-German group) I’ve completed reading two short books which I picked up almost by accident during my stint as a volunteer in our local library.

The first, by Michael Peel (a journalist with the Financial Times and formerly their foreign correspondent), has the rather lengthy title  “What Everyone Knows about Britain, Except for the British” and argues that we look at ourselves domestically  though a trick mirror, but from abroad we are seen not as the “Great Power” we think we are (and maybe used to be) but as a seedy, incompetent "has-been"and something of a laughing-stock.  The book is, in my view, uneven, and spends rather too long on uncomplimentary comparisons with such as Thailand and Nigeria, but is packed with useful information and perspectives.

Here’s one: “In 2023 the [Conservative} government raised the personal pension investment annual tax-free allowance from £40 000to £60 000 – a perk worth up to £9 000.”  (footnote on page 24).   

For the past 48 hours our Labour government has been desperately trying to reduce the money we spend on allowances for disabled people but, as far as I’m aware, has as yet done nothing to reduce this absurd favour for those rich beyond most people’s wildest dreams.

The second book is a novel by the former Labour MP and Minister Chris Mullen entitled “The Friends of Harry Perkins.”  Published in 2019, three years after the Brexit referendum, it tells  the story  of what the history of the Labour Party, still in Opposition, might have been.

After an unstated time period the fictional new Leader of the Opposition addresses the Shadow Cabinet as follows:

“. . .[We] have to go into the next election with an economic programme  entirely distinct from that  of the current management.  We all know that Brexit is a disaster.   An increasing number of our voters are waking up to that reality.  The issue can no  longer  be  fudged.    An handful of zealots have manoeuvred our country into this position and it is time we stood up to them.”

Instead, in real life,  Sir Keir Starmer and his  Cabinet has spent their first year on a programme which  seems largely indistinguishable from that of the “previous management."

To be fair there have been some progressives moves.  The minimum wage has been increased and the remaining hereditary peers have been kicked out of the House of Lords. 

 But we continue to tax the wrong things (employment with the increase in NICs); fail to tax the right things (land, pollution, extraction of scarce resources)); waste money on vanity projects (the Lower Thames Crossing,  fancy aircraft to carry H-bombs we shouldn't use but  can’t anyway  without America’s permission); maintain poverty-creating measures  (the two-child benefits limit and harsh elements of the PIP system); kowtow to the US (a Royal visit for Trump!); fail to make any substantial overtures to our nearest in dearest in Europe (rejoining the Erasmus scheme if not the Customs Union); and cut back on our “green “credentials  (issuing licences for the further exploitation of North Sea oil and permitting the expansion of airports.)

Although Sir Keir Starmer continues to give some projects aggrandising  titles (“Great” British Railways) and to make his announcements  flaunted between two oversized Union Flags, the government  continues connive at the damage being done to the four areas in which the UK can still validly claim to be among the world leaders.  These are:

 

1.    1.  Information: The BBC is the jewel in our crown, still the world’s  most trusted source of information, yet the funding of its overseas services is reduced, the domestic service similarly threatened with “defunding” and bullied by accusations of  impropriety because it “accidentally” allows a few inappropriate criticism of the  IDF to be broadcast.

2.    2. Higher Education: Our universities still have great international reputations (though not for much longer if they continue to debase the quality of their degree classifications), yet they are starved of funding, some to the edge of bankruptcy , and overseas applications to study here are impeded in order to reduce headline immigration figures.

3.    3. Overseas Development: Again, a reputation of effective development assistances among the best in the world, but instead of reversing the Tory cut of funding from 0.7% to 0.5% of GDP, funding is further reduced to 0.3% of GDP, much  of that spent in the UK to house asylum seekers – hardly development.

4.    4.  The Arts: British  TV programmes (especially comedy), films, music both “pop” and classical, are  admired and enjoyed in many parts of the world, but defunded, hamstrung by visa restriction and squeezed out of the school curriculum

Truly a bitterly disappointing first year.

 Things can only get better. 

On one way for them to do so would be for labour’s leaders not only to listen to their own MPs, but also to the Liberal Democrats and Greens. (See previous post, “The Vision Thing” 4^th November 2024).

Government by “winner takes all” fiat  is failing  even when the intentions are good.  Now we need to move on from talk of “U turns” towards democracy which is “government by discussion.”