Tax hikes can’t work

 
Smile! We’re taxing your house!

Smile! We’re taxing your house!

I don’t quite know why it is, but somehow Nick Clegg’s periodic demands for a Mansion Tax remind me irresistibly of the Jack-in-the-Box.  Every so often the lid pops open, and up jumps the deputy Prime Minister, demanding money with menaces.  But this is not economic policy.  At best, it’s a transparent attempt at populism, seeking to exploit general discontent, and our resentment of those who have more than we have ourselves.

The truth is, it would be an appalling tax.  The costs might well outweigh the revenue.  It would involve extensive (and disputed) valuations, tribunals, reassessments and what-all.  It might well introduce price changes and distortions in the housing market.

But worse than that, it would of course impact on wealthy individuals, who might (though Clegg can’t see it) change their behaviour to avoid the tax.  People in £2m houses tend to pay lots of taxes already.  They also frequently have the ability to move.  If London gets too expensive, there’s Los Angeles.  If we tax their socks off in St. John’s Wood, there’s Switzerland, or Singapore, or Sidney.

More generally, we’re on the wrong side of the Laffer Curve.  In the UK, the government is spending around 50% of GDP.  That’s comparable to Italy, and well above Germany.  Many economists accept that for optimum growth and prosperity, government spending should not be too much more than 33%.

Higher taxes cannot solve the problem.  Higher tax rates will drive us further beyond the Laffer Peak, and will actually reduce revenues.  They will also block growth and economic recovery.  They are exactly the wrong thing to do.

I was surprised to see the Institute for Fiscal Studies, usually on-the-ball on tax issues, stating that George Osborne’s higher-than-planned borrowing will require higher taxes to repay it.  Same argument applies.  It may be that George will try raising taxes to fund higher borrowing and interest payments, but if he does, it will make matters worse, not better.  Sadly (and it won’t be popular to say so) we’re so far in the hole that the only way out is lower spending, not higher taxes.

Some commentators understand this, Jeremy Warner for one. But the loudest voice calling for lower taxes is perhaps Allister Heath.  He chaired a thing called “The 2020 Tax Commission”, organised by the Taxpayers’ Alliance and the IoD.  He argues that taxes should be cut to 33% of national income, that top marginal rates should not exceed 30%, that many “odds-and-sods” taxes, including National Insurance, the Death Tax, Stamp Duty and Air Passenger Duty should be abolished, and that the system should be dramatically simplified.  I won’t go into more detail — you can read it on the web — but he makes a very cogent case indeed.  If we go on as we are, there is no way out.

His booklet answers a question that’s been bothering me.  In an earlier blog I pointed out that we’re already taxing the rich till the pips squeak, so we really don’t need a mansion tax.  After all, the top 1% of earners pay 27.7% of the income tax.  But on the comment thread, someone pointed out that if they also earned 27% of the income, it would be just fine for them to pay 27% of the tax.  Touché.  I didn’t have the figures, but the 2020 booklet has.  The top 1% of taxpayers receive 12.6% of the income, but pay 27.7% of the tax.  And the next tranche — 1% to 5% of the population — get 12.7% of the income, but pay 19.3% of the tax.    The broadest shoulders already bear much more than their fair share.

But the point, of course, is not to be nice to the rich, but to make the UK an attractive — or at least tolerable — place for the entrepreneurs, job-creators and wealth-creators, who will otherwise go elsewhere.

I just hope that George Osborne is paying attention.  This country was sold down the river by one Mr. Heath.  It would be a wonderful irony if it were to be rescued by anther Mr. Heath.

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11 Responses to Tax hikes can’t work

  1. Phil J says:

    Roger, I think a big part of the problem here is that the pro euro nutters have stated their case for keeping Britain in the EU so many times, they dare not even think about NOT being ‘in’ and saving £53,000,000 per day or, furthermore, how much better off we would be by not being in at all and spending that £53m on ‘home affairs. As Manfred Man sang many moons ago, they are simply “Blinded by the Light”. No one dare hold their hands up anymore and say “Sorry, I got it wrong!” nudge nudge Camoron ;)

  2. ps3person says:

    I am not one for turning to the wealthy every time there is economic panic, however dire, but whilst I admit to having not read the figures alluded to, it does seem rather simplistic to suggest that just because the wealthiest 1% earn 12.6% of income, yet pay 27.7% of tax, they are already paying more than their fair share. For example, what of the wealthy individuals (even Lords) and institutions, off-setting their true tax liability through off shore banks and businesses? Also, the wealthiest tend to enjoy the services of top accountants, and claim much against their tax bills.

    Transparency is surely the key, and perhaps recognition of the fact that unlike the wealthiest 5%, or even the wealthiest 25%, many ordinary working class people do not enjoy huge bonuses (if any), but are often burdened by fuel poverty, and are struggling to run cars any more given the extortionate taxes they are compelled to pay on petrol, and the additional government revenue stream which used to be called road tax, but has nothing to do with road maintenance or building.

    There are many aspects to be considered before anyone can be accused of getting away with it, or paying too much tax

  3. machokong says:

    I found that the 2020 group were off on a lot of changes that needed to be made, they look like a bunch of BBC lovies to me, especially when they start using words like “fairness” in the same sentence as tax.

    First of all they want to keep VAT (a European invention!) and not only that but at the present rate, what on earth are they thinking?

    Then they want to have the threshold at £10k, which doesn’t account for inflation at all, it should be much higher than that.

    Then they go on about some 33% nonsense (not a UKIP policy I agree with) when competitors just on the Isle of Man are at 20% Fine, the Baltic states introduced their flat rate of taxes at this level, until fluctuations sorted themselves out, then lowering them down to present levels, but couldn’t we do better than that?

    I think there should be regional sales taxes, set regionally, no National taxes whatsoever and if you can’t fund the service then you can’t have it approach. I know we need an Armed forces and such and that would come from a flat rate tax of 8%, but I suppose it would have to rise to 13% because people wouldn’t accept it.

    Flat should mean flat too, nothing hidden, although when I contacted UKIP before about this I couldn’t get any specifics (even Russia isn’t completely flat).

  4. I don’t quite know why it is, but somehow Nigel Farage’s periodic demands for an immigration regulation remind me irresistibly of the Jack-in-the-Box. Every so often the lid pops open, and up jumps the Ukip’s leader, demanding telling independent businesses who they can employ and who they can’t. But this is not economic policy. At best, it’s a transparent attempt at populism, seeking to exploit general discontent, and our resentment of those who work harder, more efficiently than us and have not been spoilt by Labour’s benefit handouts.

    • Chris. says:

      It’s not populism, it’s a logical argument. There are 2.5 million unemployed and 1 million 16 to 24 year olds in this country. Why does the UK need 1 million East Europeans, who are mostly low skilled and low educated?

      Where are all these people going to live? They put strains on the schools, NHS, infratsructure and cause unease amongst the indigenous population.

      • Will says:

        Couldn’t agree more with your comment on immigration Chris. Where the hell is the up side for us or our economy in allowing millions of eastern Europeans to come to live, work, commit crime, or scrounge benefits, moreso at a time of economic strife? It’s completely insane! Even if we were not in economic difficulty, there is an overwhelmingly strong case against this ludicrous EU sponsored farce, when those who do not belong here, and have never contributed in any way to our economy and institutions, can make demands on our benefits, education, housing, and healthcare services. The only way is out

  5. Joseph Croft says:

    I think taxes should be lowered , we should encourage wealthy people here not drive them away and take
    there wealth with them , VAT should also be lowered , this government keep on about our debt , but give
    billions away in foreign aid , our NHS gives free treatment to any body and the powers that be
    encourage it , we also spend millions on legal aid for terrorists , does this sound like a country in debt

    • ps3person says:

      Nope…it sounds like a country with a very disturbing set of priorities, and a strange sense of the importance of her own people!

  6. Here are the facts:
    We have a debt of between 1,000-1,100 billion pounds at the moment and it is rising fast.
    At just 1% per annum, that comes to between 10 and 11 billion pounds interest.
    If it ever got up to 5%, then it would cost, every year, £50 billion pounds which is the same sort of thing as our “club membership” for the EU.

    How much are we actually spending on defending ourselves? Why does the figure of £30 billion come to mind? The total expenditure of all the government is just under £700 billion per annum.

    Unless there is a radical reform and a radical cut-back of government expenditure before the next election, we are going to find that we are spending all our shrinking tax income on servicing our totally unnecessary debt.

    Roger – please correct these figure if they are wrong.

  7. DougS says:

    “…People in £2m houses tend to pay lots of taxes already. They also frequently have the ability to move. If London gets too expensive, there’s Los Angeles. If we tax their socks off in St. John’s Wood, there’s Switzerland, or Singapore, or Sidney….”

    I suspect that dear old George is aware of this and, as a result, will probably aim his tax gun at people who can’t escape – like pensioners!

    The coalition is agonising over the £1bn cost of nursing care for the elderly (although they’re taking that amount as a ‘stealth’ tax) in their recent proposal. I would suggest that they lop £3bn off the foreign Aid budget and pay all associated elderly care costs – and drop the cap to £20k.

  8. RB says:

    “But on the comment thread, someone pointed out that if they also earned 27% of the income, it would be just fine for them to pay 27% of the tax. Touché. I didn’t have the figures, but the 2020 booklet has. The top 1% of taxpayers receive 12.6% of the income, but pay 27.7% of the tax. And the next tranche — 1% to 5% of the population — get 12.7% of the income, but pay 19.3% of the tax. The broadest shoulders already bear much more than their fair share.

    But the point, of course, is not to be nice to the rich, but to make the UK an attractive — or at least tolerable — place for the entrepreneurs, job-creators and wealth-creators, who will otherwise go elsewhere.”

    We hear this all the time.

    I am a UKIP supporter and member. But this oft repeated nonsense that the rich pay more than their fair share because they pay 27% of income tax is getting really irritating.

    1. The very rich ensure that much of the money they make is not declared as “income” as defined. It travels through myriad routes to their bank accounts, never getting close to being taxable here in the UK. And thus the percentage of income tax they pay is by no means a reference to the wealth they actually have.
    2. The gap between rich and poor is now larger than it has ever been. In the 21st century the gap is bigger than it was when Dickens was writing.
    3. The mansion tax idea has lots of problems but it does come from the right place – namely that wealth should be taxed rather than just income. You can go on the Telegraph today and find everyday proles like me alleging that this tax hits those who are asset rich and cash poor. There are about 75000 houses worth more than 2 million and over half are holiday homes. It irks me that proles like me who still pay the vast majority of taxes post that in their opinion these houses are all full of little old ladies rattling around in a 7 bedroomed mansion with no money. What nonsense.
    4. The very rich have done unbelievably well in the last 25 years.
    5. The very rich pay nowhere near their fair tax.
    6. As for they will all leave, let them. Do we really think these are the only people with good ideas or the wherewithall to build something? In fact it might be good if their iron grip was lessened with them sodding off. If they wont pay a fair tax from their profits made here not just on the back of their apparent brilliance but with the use of the infrastructure of this country paid for by all of us, then let them go. They would be replaced in pretty short order.

    UKIP, the tories and the right generally need to get off this hobby horse that tells us that the very rich are some how saintly haloed untouchables, referring always to their entrpreneurial brilliance. They have shown themselves largely to be greedy sods who have little regard for a proper balance between what they take and what they give.

    So, with these people able to pay to get their money out without it being sniffed by a taxman, why would you seek their protection? At least if they have assets here they can be taxed. But no, you opine that they will “leave” and everything will be worse. I dont honestly think you can be more mistaken. The richest 10% are now 100 times better off than the poorest. 100 times. When is this figure unacceptable? Or is your view that it never is? The top 10% now have an average of 2.5 million in assets by age 50, whilst the poorer who work for them are lucky if they have 10k. When is enough enough?

    The very rich should pay much much more than they do.

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