In “Alice Through the Looking Glass”, the White Queen prided herself on believing six impossible things before breakfast. I don’t know if Chancellor George Osborne can do that, but he can certainly believe two incompatible things at the same time.
He seems to “get it” that high taxes are bad for business, growth, jobs and economic recovery. He’s reducing corporation taxes with the express objective of attracting companies and inward investors to the UK. It’s due to come down to 22% next year (though it still compares poorly with Ireland’s 12½%). Indeed his approach has been noted by accountants KPMG, who are reporting that the UK is now “the most attractive place to do business” because of low tax rates. Great news for the Chancellor ahead of his budget statement (though as my old mother would have said, “I wonder what they want to borrow?”).
Yet a recent news story says that the government will abandon the Tory pledge on raising thresholds on the Death Tax, “in order to fund social welfare costs”. How many times do we have to say it? High tax rates don’t raise extra revenues. The may have the opposite effect, driving away investors and wealth-creators. Whenever we hear that taxes are to be raised “to fund something else”, alarm bells should ring. Economics doesn’t work like that. George, if you understand the damage that high tax rates do — why not do the right thing, and cut rates?
I have been encouraged to see heavyweight commentators, including Allister Heath and Jeremy Warner, arguing the case for lower tax rates. Heath was specific that lower rates would pay for themselves in economic growth before the next election. And I see that the excellent Graham Brady (champion of Grammar Schools, and Chairman of the 1922 Committee) has also urged further tax cuts in next month’s budget.
On the top rate of income tax, I suspect Osborne actually knows that the 45% rate does more harm than good, and reduces revenues, but he lacks the moral courage to do the right thing, terrified that Ed Balls will accuse him of “tax cuts to the rich”.
A perfect example of a tax that does more harm than good is the Air Passenger Duty. Of course the airlines have an axe to grind, but nonetheless a report by PWC says that scrapping the tax would create 60,000 jobs, would increase economic growth, and would benefit the economy by £16 billion by 2015. It’s a no-brainer. Will George have the guts to do it?
I recently came across a good example of the damage done by airline taxes. The Philippines decided to introduce a tax on incoming flights based on the length of the flight. But (as I constantly say), you can’t change taxes without also changing tax-payer behaviour. In this case the airlines responded by adding a stop-over somewhere near the Philippines — for KLM, that’s in Taipei, about 80 minutes from Manila. So the tax collected is much less than planned, on the shorter flight. And Manila has just become much more difficult and tedious to get to (the Taiwanese have passengers leaving long-haul flights and going through security on the short stop-over in Taipei). So tourism and inward investment suffer. I understand that the Philippine government now realises it’s scored an own-goal, and is reviewing the tax.
Just a thought: a few months ago, the EU was proposing to put a very similar tax on incoming long-haul flights. Fortunately they backed down in the face of almost universal opposition from the rest of the world. Had the tax gone ahead, it would have created exactly the same problems in Europe that the Philippines have faced.