In the 22nd 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 8th 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 13th 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.”
and no surprise given the need to repair 14 years of “austerity.
ReplyDeleteBut there never was any ‘austerity’. Austerity would have been a real-terms reduction in public spending, and every year since at least 1995 public spending, adjusted for inflation, has gone up (except 2021-2022 as the furlough scheme was removed).
Don’t get me wrong, we desperately need to reduce public spending in real terms. But the coalition government didn’t manage it, neither did any of the Conservative governments from 2015, and this Labour government seems determined to embrace bankruptcy — basically replaying the second half of the nineteen-seventies with, hopefully, the same result of the population coming to its senses and electing a Conservative government that, unlike the previous ones, is prepared to grasp the nettle and do what needs to be done.
It’s just a pity that, as in the seventies, we’re going to have to got through a lot of pain — strikes, huge tax rises, bankruptcies of councils and, eventually, the Treasury, and, I fully expect, blackouts and power cuts towards the end of the decade thanks to Mr Miliband’s madcap schemes — in order to get to where it’s been obvious for years that we need to go.
I put "austerity" in inverted commas becasue it is a rather vague concept and difficult to define, but it is the term in general use. The indisputable fact is is that public spending did not reach that which was necessary to maintain and even improve services to keep them up to standard for growing and increasingly ageing populations and to take advantage of advances in science. The truth is in point 7. We now have the opportunity to catch up, but it will cost.
ReplyDeleteThe indisputable fact is is that public spending did not reach that which was necessary
DeleteOkay, so, you understand that ‘austerity’ is a misleading term, and there were never any public spending cuts. You’re just upset that public spending, which was already rising unsustainably fast, didn’t rise even faster.
We now have the opportunity to catch up, but it will cost.
No, we don’t; we have, in public-spending terms, been living beyond our means for two decades now, funding it by borrowing on the never-never. Either we radically reduce our expectations of what the state can provide for us, or the government is going to go bankrupt and the reduction will be forced on us anyway.
Not if the necessary expenditure is financed by taxation rather than extra borrowing. Hutton gives two viable examples, fuel and council tax re-banding. Others I've seen floated include the abolition of the tax free allowance, , a rise in the tax rates on dividends and capital gains, or even a new higher top-rate on income tax. Any one will be greeted with shrill cries of indignation by the Tories and their sycophantic press, but Labour should hold firm it its principles.and set about mending the public realm. Remember, we are still only slightly above the OECD average, and there's a lot of neglect to put right.
DeleteNot if the necessary expenditure is financed by taxation rather than extra borrowing.
DeleteIt can’t be. We’re already on the right hand side of the Laffer curve: since getting into power Labour has done nothing but increase tax rates, and all that has achieved is to drive actual tax receipts down. The only way to increase tax receipts, which is what would need to happen to cover increased expenditures, would be to grow the economy to generate more wealth; and the only way to do that is, as I say, to radically reduce our expectations of what the state can do for us.
Others I've seen floated include the abolition of the tax free allowance, , a rise in the tax rates on dividends and capital gains, or even a new higher top-rate on income tax.
All of which punish productivity: why work harder if it just means the government takes an even greater proportion of your income? Why take the risk of building a business if the government will just take most of the capital growth you have generated? So all of these are in the category of increasing tax rates that will lead to reduced tax receipts as people change their behaviour.
Remember, we are still only slightly above the OECD average,
The OCED average is far too high, and the other countries which are around and above us are going to face the same crunch point as we are heading for. France, for example, is pretty much bankrupt already.
Most economists regard the Laffer Curve as a joke: a convenient trick perpetrated by the wealthy to avoid paying their share. Conversely it can also be argued that people's objective is to maintain their standard of living. If take-home pay is reduced by higher taxation then they work harder or take on an extra job so that their standard of living doesn't fall. You pay your money and you take your choice.
ReplyDeleteMost economists regard the Laffer Curve as a joke: a convenient trick perpetrated by the wealthy to avoid paying their share.
DeleteI mean that’s simply not true. The Laffer curve is standard economics, and obviously true in that if you set tax rates to zero then you will get no tax receipts, and if you set tax rates to 100% you will also get no tax receipts (because no one will bother to do anything) so somewhere between the two there must be a point where you maximise reciepts.
What economists argue about is the shape of the curve, and what other sorts of thing might affect it. But as a pure concept, it’s generally accepted.
More to the point, we are, as I wrote, seeing it work out in practise as Labour raises tax rates and as a result tax receipts go down: https://obr.uk/box/the-in-year-shortfall-in-2024-25-receipts-and-its-impact-on-the-forecast/
Conversely it can also be argued that people's objective is to maintain their standard of living. If take-home pay is reduced by higher taxation then they work harder or take on an extra job so that their standard of living doesn't fall.
They are more likely to take the first opportunity to vote out the government which reduce their standard of living at the first opportunity and replace them with a government which will reduce taxes. That’s what I will be doing when Mr Starmer calls the next election, and I expect to be in the majority. The only question is how much damage Mr Starmer and Rachael from Accounts can do to the country before we get that chance.
They might just as easily be so pleased with the improvement in public services, greater employment and employment security, more available and affordable housing and improved relationships with the EU that they vote such a government in for another term, and then another after that. We shall see. I go away on holiday now so will have to leave it at that. Thanks for the challenges.
ReplyDelete