When a penny is just a penny

Observations - Taxes

This month's Budget was, oddly, seminal yet not severe on taxation. It broke a 20-year spell which said that direct tax rates can go down but not up, and that the need to spend more was no excuse for tax increases.

Pundits were full of dire laments about a Budget that "smelt of the 1970s", "smacks of red-blooded socialism" and "soaks every working man and woman".

Pull the other one. Is a penny in the pound really such a painful amount to pay for a better health service? The average taxpayer was "soaked" to the cost of about a pint of beer a week, richer people somewhat more, but there were no specific big losers, because rises will be directly proportional to income across the whole range. Old Labour used to increase the rate sharply as you got richer, and then slap on another surcharge for capitalists living on investment income. New Labour, by contrast, has exempted such income from the rise, by taxing only wages. Not exactly the 1970s Mark II.

Yet whether it was the Guardian rubbing its hands in glee or the Mail pre-announcing a taxpayers' backlash, everyone wanted to convince us that this was harsh stuff. This spin can become self-fulfilling, if voters are given an exaggerated story of the impact. Nobody is ever quite sure why they don't seem to have as much cash in their pockets as they'd like, and they may turn to their papers to see how much to blame the Chancellor. There they read stories written by people who themselves seem to have a fuzzy idea of the difference between a million and a billion, and are much prone to statistical fallacy. Last week's favourite was reporting the penny rise as a disguised 3p rise in the basic rate of tax. The total increase in the tax take was indeed as much as if the basic rate had been raised by 3p. But most of the extra will be paid by higher-rate taxpayers and employers: for basic-rate taxpayers, the penny costs just a penny.

Will these increases really be enough to pay the extra health bills, or is this just the first of many rises? The Chancellor made it clear in his Budget speech that he saw a uniform rise in national insurance rates for all incomes as a fair way of raising money for the health service. Why not go further and announce that, over the six years of the promised health increases, this mechanism will be used to guarantee the funding, with the extra penny adjusted if the need arises, but up to a maximum of, say, 3p - and falling to zero if economic growth allows?

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