Let’s talk about tax, Darling

The arguments against higher taxes fall apart under scrutiny. Darling must act in the pre-Budget rep

Here's a question: what if cutting every benefit, freezing every public-sector salary, sacking every bureaucrat, cancelling every defence contract and abolishing every quango in the land fails to plug the gaping hole in our public finances? What then? Do we keep cutting until the nation bleeds, or do we (finally) nudge and point at the fiscal elephant in the room - tax? There has been a frenzied debate in recent months over the supposed lack of honesty about spending cuts. So, in the wake of the party conferences, how about some honesty - and clarity - from our political and media classes on the need for tax rises?

The debate over whether or not to increase tax is suffused in myths - the result of three decades of poisonous propaganda from the neoliberal right. Myth 1: We are a high-taxed nation. Myth 2: High taxes lead to low growth. Myth 3: The new 50p tax rate will lead to the rich "quitting Britain". Myth 4: Only spending cuts, not tax rises, can solve the so-called “debt crisis". Myth 5: The public prefers cuts in spending to increases in tax.

Good riddance

These are right up there with unicorns and King Arthur, so let's take each of them in turn. By the standards of our Continental cousins - and Gordon Brown's "stealth taxes" notwithstanding - Britain remains a relatively low-taxed nation. Looking at the tax burden as a percentage of national income, OECD figures reveal that Britain (at 39.5 per cent) remains far below Germany (44 per cent), Italy (46.4 per cent) and France (48.7 per cent) and at almost the exact same level as in 1990, when Margaret Thatcher left office. It is conveniently forgotten that Thatcher only cut the top rate of tax, from 60 per cent to the current 40 per cent, in 1988; for nine of her 11 years in power, the darling of the Tory right, the Mother Thatcherite, presided over a higher top rate of tax than the one now being introduced by the "socialist" Brown.

Nor do such higher rates of tax discourage growth. Whatever the theoretical debates, consider the empirical evidence. Look at the free-market, low-tax US: for an 18-year stretch from 1946 to 1964, the top rate of tax bounced around from 82 to 92 per cent and yet the US enjoyed one of the longest sustained periods of economic growth in its history. The same again in 1993: Bill Clinton raised the top rate of tax from 31 to 39 per cent, in the teeth of right-wing opposition. Result? The "Clinton boom".

So will the 50p tax rate, which catches people earning more than £150,000 from April 2010, help Britain go from bust back to boom, or will it provoke high earners to flee the country? Some of the more selfish members of our moneyed elite may want to "quit" Britain: the private equity boss Guy Hands has already relocated to Guernsey and the self-confessed "alcoholic, neurotic, psychotic, self-obsessed whinger" - and born-again Tory - Tracey Emin warns that she will head for France, where cultural figures (Roman Polanski, anyone?) are more valued, she says, and where, she (wrongly) believes, taxes are lower.

Good riddance. And let's be clear: there won't be a mass exodus of the wealthy from British shores. One estimate did suggest 25,000 people might leave the UK to avoid the tax - but that's less than 1 per cent of the 3.8 million existing top-rate taxpayers. Some British millionaires may opt to avoid the new tax - overpaid presenters at the BBC such as Jeremy Paxman have already been advised by the supposedly left-wing corporation to set up service companies to help them pay less tax and escape the full impact of the 50p levy. Nonetheless, the independent Institute for Fiscal Studies says the new top rate will bring in much-needed extra revenue - roughly £2.5bn by 2012, according to official figures - because "the government has got better at shutting down ways of avoiding the tax".

In fact, the time is ripe for the Chancellor, Alistair Darling, to raise the stakes in his pre-Budget report next month by bringing in the new tax at a lower level of income: £100,000 rather than the planned £150,000. He is said to be considering the option, which would leave 98 per cent of taxpayers unaffected but the Tories - who have reluctantly pledged to stick with the 50p band - reeling, disoriented and divided on how to react.

But aren't spending cuts, not tax rises, the solution to the debt? On the contrary, the real reason for the spiralling budget deficit is to do with collapsing tax revenues and not spending increases. In the year to July, according to figures from the Office for National Statistics, government spending was up 7.5 per cent, but because of the economic slowdown and rising unemployment the tax take fell by 20 per cent. So the inconvenient truth is that, without tax rises, we will never be able to close the fiscal gap.

But in the end, tax rises are unpopular, aren't they? Perhaps, but according to Ipsos-MORI, no consensus exists on how best to pay down the debt and the public is divided between maintaining spending and increasing taxes (38 per cent), cutting spending on public services (29 per cent) and doing nothing (31 per cent).

Flawed Cameronomics

Meanwhile, the supposedly "progressive" Tories remain committed to scrapping inheritance tax on estates worth less than £1m - a measure that would benefit only the 3,000 richest households and which, at a cost of more than £3bn a year, fatally undermine their commitment to balancing the books. Cameronomics is intellectually and morally flawed.

No one normally likes to have their own taxes raised. But would the average taxpayer object to a tax on obscene bank bonuses, which are expected to amount to roughly £4bn this year? Would they object to a one-off windfall tax on the utility companies? Or to reforming tax relief on pension contributions, which nets the richest 1 per cent of the population £10bn in subsidies from the rest of us? Would the public - Sir Fred Goodwin aside - really object? I happen to think not. Darling, do you?

Next week: John Pilger
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