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30 August 2023

Britain’s tax delusion

It is useless to pretend that in a world of high public debt voters can be spared increased taxes.

By New Statesman

Voters might reasonably ask what there is to choose between a Conservative creed expressed in ­September 2022 by Liz Truss, who told the House of Commons: “You can’t tax your way to growth,” and Labour’s approach under the shadow chancellor Rachel Reeves, who on 26 August told the Sunday Telegraph: “I don’t see the way to prosperity as being through taxation. I want to grow the economy.” Both parties advocate paying for public services with the tax receipts that would come from growth and higher GDP, rather than higher taxes. Both parties have represented British workers and ­businesses as struggling beneath a tax “burden” that is at its highest level for several decades.

It is true that the total amount of tax the UK levies relative to its GDP is higher than at any point since the mid-1960s. But in relative terms, Britain is a fairly low-tax regime, with a tax-to-GDP ratio more than seven percentage points lower than that of major European economies. In income tax, the highest 10 per cent of earners pay 60 per cent of total receipts. This does not show how munificent the wealthy are but just how much better off they are than the median earner, in a system that helps to entrench inequality still further.

The inescapable rule is that any government that wishes to spend an amount equivalent to 40 per cent of GDP on public services will have to tax 40 per cent of economic activity. Ageing populations, the effects of climate change, high levels of public debt and higher rates charged on borrowing mean states face large and growing demands for spending. The challenge for Western democracies is to provide for that spending while encouraging investment and job creation. It is a challenge that Britain is failing. Instead, the UK’s tax system is quietly managing our ­economy towards disaster.

[See also: Scottish Labour should do less, better]

Britain’s approach to taxation is riddled with complications, loopholes and obstacles to growth. The withdrawal of child benefit from parents earning more than £50,000, for example, creates a marginal tax rate of 68 per cent. Through illogical measures such as these, some of our most talented workers are actively discouraged from working harder, training and seeking promotion.

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The same is true for businesses: more than 99 per cent of companies in the UK are small or medium-sized businesses, tens of thousands of which keep their revenues below £85,000 per year to avoid paying VAT. Others must navigate a labyrinth of exemptions that create unnecessary work and lose the Exchequer billions.

A lower headline rate of corporation tax may appear business-friendly, but over the decades it has been paid for by a loss of the tax reliefs that made it affordable for businesses to buy machinery or build facilities. This skewed the UK’s economy towards services, on which it is now heavily dependent, and fostered growth in the small number of cities in which such businesses were concentrated, while other parts of the country lost out. The UK has the lowest business investment of any major economy.

At the same time, lower taxes on capital gains and exemptions from National Insurance have persuaded individual investors in the UK to hold wealth as static assets such as land and property. This creates a system that is not just dysfunctional but profoundly inequitable, in which the average effective tax rate paid by those earning more than £10m a year is lower than that of most nurses. In 1845, Benjamin Disraeli wrote of England’s division into “two nations”: the rich and the poor. Today, the gulf between Asset Britain and Austerity Britain is as wide.

Labour’s programme has so far been defined not by radicalism, but pragmatism and caution. The tax changes it has proposed – including VAT on private-school fees and a change to the tax status of non-domiciled residents – would raise around £5bn, equivalent to 0.5 per cent of total ­receipts. The only area in which there is significant room to raise taxes is on unearned income: doing so would create not just a fairer system but one that rewards using capital more productively.

A YouGov poll published on 29 August found Labour to be more trustworthy than the Conservatives on tax. But it is useless to pretend that in a world of high public debt and increasing demand on public services, voters can be spared higher taxes. The question is: what kind of taxes and whether they can be more effective and equitable.

[See also: Tax wealth and reward work]

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This article appears in the 30 Aug 2023 issue of the New Statesman, The Great Tax Con