06 June 2006

The fundamental problem with the Tories is not tax cutting.

One of the things that me and some right-wing bloggers would agree about, is that not enough is done to boost the income of the lowest earners.

Their solutions revolve around income tax cuts that involve either a cut in public services or a politically unlikely shift of the burden of taxation from the wealthiest to middle earners. This is the flat tax that Tim Worstall, the Adam Smith Institute, George Osbourne and David Cameron would love to inflict on us (while it does simplify taxes and potentially save on administration, without a corresponding redistributive measure such as a Citizen's Income it would be a financial disaster for the lowest earners).

There are a lot of myths surrounding the 'tax cutting' days of Thatcher. In fact Thatcher only managed to cut taxes for the wealthiest earners. Taxes for the lowest earners were increased just as the services that benefited these low earners (healthcare and education they couldn't otherwise afford) were cut back. This was the double whammy of Thatcherism - cutbacks in public services and the move to more regressive taxation. The increase in VAT from 8% to 17.5% and the extending of VAT to fuel utility bills, the move from property Rates to the more regressive Council Tax (via the politically impossible Poll Tax) and the cutback in the sorts of public expenditure that benefited the poor. That is the Tory record.

Thatcher hardly reduced the overall tax burden at all (it stayed around 40% of GDP), she just shifted the tax burden onto the poor and was forced to up expenditure (and debt) to pay for the large unemployment, rising civil unrest and crime caused by these policies. That is the real record of the Tories that Cameron would take us back to. If Cameron has changed his position, where is the evidence of that in terms of policy commitments? The hints of policy we have so far from Cameron confirm his position as still the same as Margaret Thatcher - tax cuts and less public services, an expanded voluntary sector (that could never replace even a fraction of what the public sector achieves), more road building and less public transport, and most important of all the promise to 'simplify' taxes. When a Tory makes this statement that is the most worrying of all. Thatcher herself only promised to 'reform' taxes, which considering her failure to cut the overall tax burden, it was a truthful claim. What the Tories mean by 'tax cuts' (whether they are open about it or not) is tax cuts for them, which excludes most people. Taxes for most of us will rise under the Tories, I have no doubt about that.

So what is the answer to improving the income of low earners?

Well I would prefer the administration saving, poverty trap avoiding, Citizen's Income (and curiously so would a few bloggers on the right - Devil's Kitchen, Stumbling&Mumbling etc. Although some of them miss the point by wanting it to be means tested). This Labour government has preferred the more administratively complex Working Tax Credits and also a National Minimum Wage set at quite a low level. These policies have still managed to help millions in a very effective way but they have many problems I believe a CI would avoid.

Whatever you think of Labour's policies in these areas, it has made work more attractive by providing a more livable wage. The Tories would take this incentive away by freezing the minimum wage and scrapping tax credits.

To conclude, if you are lucky enough to pay tax at the highest rate (only 11% do) and don't care about the problems caused by rising inequality, a Tory led government won't concern you. To prevent this Cameron nightmare, you need to support Labour.

6 comments:

  1. Neil, you somehow inexplicably fail to mention that I am one of those evil right wingers who would like both the flat tax and the CBI.

    You also fail to note that the flat tax proposal would actually be more progressive than the current system.

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  2. You're not making any sense again.

    Blair hasn't taken us back to 1970s style Labour (or do you disagree?)

    So why are the economic problems of the 1980s the "real record of the Tories that Cameron would take us back to"?

    Is there something magical which protects Labour, but not the Tories, from recidivism? If so, what is it?

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  3. Thatcher hardly reduced the overall tax burden at all (it stayed around 40% of GDP)

    Which is odd, 'cos I thought that the tax burden was about 37% of GDP in 1997, so some Tories somewhere must have cut taxes...

    DK

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  4. Tim: "I am one of those evil right wingers who would like both the flat tax and the CBI."

    If you mean both at the same time, I am with you and I am glad to hear that that is your position.

    The problem with the flat tax is that, on it's own (and that is what the ASI were proposing) it will inevitably mean drastic cuts in public services that harm the poorest.

    "You also fail to note that the flat tax proposal would actually be more progressive than the current system."

    As well as taking the poorest out of the tax system, it also moves the burden of tax from the richest to the middle income earners.

    You and I both know that that is politically unsustainable. Because of this, the flat tax is essentially just a tool to cut public expenditure. The small cuts in tax that low earners would receive would in no way compensate them for the loss of healthcare and education. That is why it is such a regressive policy.

    If however a flat tax was coupled with a decent CBI that compensated both the lower and middle earners enough, then it would be viable. The only problem here might be that private health provision (as demonstrated in the US) is not as efficient as the NHS in providing healthcare.

    The private health sector has extra bureaucracy in assessing individual premiums and perverse incentives to provide operations and treatment that patients don't need. It also has little incentive to provide equal priced care to the most expensive (i.e. old and ill) patients who need it most.

    To maintain a level of taxation sufficient for essential state provided healthcare and education etc, might mean the flat tax is problematic.

    Anon: The real record of the Tories are the rise in regressive taxes - VAT from 8% to 17.5%, Council Tax etc. They shifted the burden of taxation onto the poorest. The only people who benefited from tax cuts were those paying the top rate of tax (11% of earners).

    As for economics, growth has been higher under this government than under the Tories who gave us two deep recessions.

    It would be very convenient for you to claim that Labour should get no credit for this economic management.

    You seem to want it both ways. You try to blame the 1991 recession on Labour (the Tories had been in power for 12 years), yet the 9 years of record growth under this government is somehow all down to the Tories. You seem guilty of revisionism that big brother would have been proud of.

    DK: I will dig out the figures from the IFS, but a few percent cut in tax (if it was that much) that went largely to the richest earners, doesn;t seem much to show for the decimation Thatcherism did to public services

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  5. Stumbling & Mumbling = "on the right"?

    Neil? Chris is very open about his belief in socialism. If you're going to use outdated left vs right rhetoric, can you define your terms in a way that someone (anyone) can understand them?

    Also, don't buy into Polly's belief that a flat-tax would be regressive. I'm not sold on the idea of one, but regressive it aint; you set the threashold at a sensible level (about £12K) and the tax at a viable rate (40-50%) then most people on avarage to below income suddenly pay very little tax if any at all, whereas the highest earners end up paying the same amounts if not more.

    As it happens,t he more I read about the options and possible implementations, the harder I find it to argue against it - and I'm definately a socialist on the "left".

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  6. Matgb: Yeah S&M is a leftie, I got confused with someone else.

    Mat, if you are socialist, I bet you are pissed off with your Lib Dems, now they have ditched the only redistributive policies they had - 50% top rate and local income tax.

    Their proposed cut in the basic rate makes them potentially to the right of the Tories, it must be gutting for lefties who voted for them.

    Thats the trouble with the Lib Dems, its like writing a blank cheque. You vote Lib Dem thinking they are on the left, then find the councillor/MP is an ex-Tory with right wing views and the party go and change their policy direction completely!

    The flat tax is regressive to middle earners from high earners in terms of tax take and regressive to lowest earners in terms of the inevitable public service cuts from lower tax revenues.

    Yes you can take the lowest earners out of taxation (which is great), but to reclaim the huge amounts of lost revenue (because the higher personal allowance reduces everybody's tax bill), you have to try and set the rate at unsustainable levels that mean middle earners are hit hardest to the benefit of the top earners. The middle earners would not accept this and the whole result would be massive cuts in public spending which hit the poorest the most.

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