At the last general election, in 2015, the UK was denied an honest debate on taxation. The Conservative manifesto foolishly promised no increases in income tax, National Insurance and VAT. The “tax lock”, which aides later revealed was devised “on the hoof”, exemplified David Cameron’s slapdash approach to governing. It was irreconcilable with the Conservatives’ promise to deliver both a budget surplus by 2020 and their spending commitments. When in March the Chancellor, Philip Hammond, announced a justified increase in National Insurance for the self-employed, the Tories’ earlier pledge forced him into a rapid U-turn.
Theresa May should ensure that the tax lock is not repeated. It is reckless for any government to bind its hands in this manner, not least one charged with the epic task of negotiating Brexit (Mrs May has already wisely abandoned George Osborne’s earlier budget surplus target).
In the run-up to the publication of its manifesto, Labour has announced its own tax lock, promising 95 per cent of taxpayers that they will endure no rise in income tax, National Insurance or VAT. Instead, it will target those who earn £80,000 a year or more, potentially introducing a new tax bracket. Labour’s commitment to progressive taxation is commendable. Real earnings growth has halted and average earnings are not forecast to return to their pre-crisis peak (2007) until 2022. Few voters can bear further tax increases when the overall burden is already at its highest level in nearly 40 years.
However, rather than taxing income more heavily, Labour and other parties should consider taxing wealth and static assets. The fourfold increase in property prices since the early 1990s has enriched homeowners at the expense of younger generations. And yet, for decades, politicians have refused to tax this unearned windfall. Even now, the council tax bands are based on property valuations made when the levy was announced by John Major’s government in the early 1990s.
In an age when capital is so mobile and the rich are so adept at avoiding taxation, property taxes have the merit of being easy to collect. Even the most determined tax avoider cannot move his mansion to Geneva. Property taxes also benefit the economy by shifting investment away from housing and into wealth-creating industries, so they are less economically harmful than taxes on consumption and income.
Similar arguments apply to the taxation of land (69 per cent of which in the UK is owned by 0.6 per cent of the population) and inheritance. There is no justification for increasing the threshold for the latter to £1m (which would benefit only 6 per cent of estates), as the Conservatives promised in 2015. Wherever possible, the tax system should reward productive effort and target unearned wealth.
The next government faces profound fiscal challenges. Public borrowing for 2016-17 was £52bn but services are already frayed from seven years of austerity. The social care system, in particular, demands an urgent funding solution. As they confront these challenges, all parties must offer the fair and innovative answers absent from previous campaigns.
This article appears in the 10 May 2017 issue of the New Statesman, Why the Tories keep winning