Taxes, taxes, taxes

I realise very few people see it as an interesting exercise to sit down and work out how the plans for £29 billion of net tax rises break down.  But if you’re going to think about better ways to close the gap between what we spend and what we raise, then it’s not a bad idea to look at what we’re doing at the moment.  And in rough and ready fashion, based on the Emergency Budget* figures, the planned breakdown of net tax rises in 2014-15 is about as follows:

Tax Net revenue raised (£ billion) Tax Net revenue raised (£ billion)
VAT and IPT 13.9 Green taxes 0.7
Pension contribution relief 4.6 Stamp Duty 0.3
National Insurance 3.3 Inheritance Tax 0.3
Income tax 2.5 Other tax rises 0.2
Bank levy 2.4 Other tax cuts -0.2
Other pension tax breaks 2.1 Council Tax -0.6
Capital Gains Tax 0.9 Various business taxes -0.8
Sin taxes 0.8 Corporation Tax -1.3

Those figures conceal significant tax cuts in terms of income tax (£3.9 billion goes to raising the personal allowance by £1,000) and National Insurance (£3.7 billion spent on raising the threshold for employers’ NI to offset some of the increased costs), as well as a number of tax hikes in Corporation Tax to help pay for a headline rate cut. But in terms of where the main burden is falling, you’ll get a fair idea here.

It shouldn’t take too much to work out that any attempt to raise another £26 billion, say, is going to be very politically difficult.  Labour have argued for keeping the bankers’ bonus tax (£3.5 billion or so – assuming revenues don’t fall if the tax stops being a one-off), and they’ve pointed to their National Insurance plans too (£3.7 billion more).  If you were to argue for, say, 5p on the higher rate of income tax (taking a very brave example), the Treasury’s Ready Reckoner suggests you’d raise about £4.6 billion.  Lowering the starting point for the 50p rate to, say, £100,000 might raise £1.3 billion (or about half that, if you raise the 40p rate to 45p – otherwise you’re double-counting).  The Liberal Democrats’ famous ‘mansion tax’ was intended to raise about £1.7 billion.  If, in another act of extreme bravery, you were to raise Inheritance Tax to 60%, you might net about £1.4 billion.  The exact amount of money you could get from tackling avoidance may very well be substantial – but it’s difficult to bank on, and I wouldn’t envy the Chancellor who tried to rely on it as a main tool for tackling the deficit.

This clearly doesn’t, even in terms of orders of magnitude, add up to a £26 billion alternative to the Coalition’s plans. So in the end, substantially higher taxes will mean that people on moderate incomes will also end up paying more – not just the wealthy and the banks.  In saying that, I’m not arguing against the idea: in almost all cases, tax rises are more progressive than cuts to services – and of course, it’s quite possible to use some revenue to compensate the poor too.  It’s no accident that Scandinavian social democracies pay substantially more VAT than the UK – if you’re serious about social justice, the volume of money for benefits and services will make much more of a difference than the exact degree of redistribution managed through taxes on their own, and the tax burden has to be fairly widely spread in order to be politically accepted.

So not only would a centre-left government almost certainly end up raising VAT at some point, for instance; it would probably be right to do so, though probably not right now.  It makes sense that, in an economy which needs to move towards more saving over time, we might increase taxes on consumption.  The debate over how progressive/regressive VAT is has run and run, but it’s certainly more progressive than even more service cuts – and if it’s difficult enough to find £26 billion extra, try finding £40 billion instead.  In the same way, further income tax/NI rises would be pretty hard to avoid.  Property taxes would be politically very difficult, but probably sensible as policy.  And if the centre-left want to reduce the damage done to public services, welfare benefits and public investment more generally, then we’d better start learning how to argue it’s worthwhile for all of us to pay more taxes in a good cause.

How much of this does Labour need to spell out?  Some of it, at least – at least as an indication.  The Conservatives didn’t give much away on their plans in 2010, but they did highlight plans to raise the retirement age faster and taper tax credits more aggressively.  Not an obvious route to electoral success, in a way, but a manifesto which made no mention at all of any difficult tax/spending changes wouldn’t have been more popular: it would just have made people think they either weren’t being given the full story (even more than they already did!) or that the party in question shouldn’t be trusted with the public finances.  And in reverse, the same applies to any party of the left.

* Figures weren’t provided for revenue raised by the 50p rate, the restriction of the personal allowance from £100,000 or revenue raised from Labour’s changes to ‘sin taxes’ (alcohol, tobacco etc.) – I did find a Treasury figure for 2014-15 for the first, but the other two had to be extrapolated a bit from previous Budgets. But the broad outline stands.

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