Why can’t we talk about income tax?

We need to reframe our view of income tax as a source of community benefit, not as a raid on individual pockets.


Of all the elephants in the political arena, the idea of increasing income tax rates is one of the most immovable. The present government is driven by the idea that taxes are fundamentally bad, and that people and businesses should pay as little tax as possible. Labour is less dogmatic, but remains very nervous about any move that would increase the tax take from anyone other than the rich and institutional tax evaders.

The defenders of a low-tax regime say that people should be able to make their own decisions about how they spend their earnings. Or that high taxes will drive businesses, top-flight managers and entrepreneurs away from the UK. Or that the public sector squanders public funds on ineffective projects.

There is some truth in all of these points: if there wasn’t no one would believe them. As it is they’ve become mantras, unquestioned in too many influential circles. We have been conditioned into believing that taxation is inherently bad. So what is almost never discussed in public, let alone in Parliament, is the case for raising income tax rates.

The Government is making it clear that, if re-elected, its austerity policies will continue. In its commentary on the Chancellor’s Autumn Statement in December 2014 the statutorily independent Office of Budget Responsibility observed that the government was in the fifth year of 10-year programme of reducing public expenditure. It stated: Around 40 per cent of these cuts would have been delivered during this Parliament, with around 60 per cent to come during the next. The implied squeeze on local authority spending is similarly severe [1]. The Chancellor appears sanguine about this.

Cutting the state is a political choice. It sounds good to both social and economic liberals, but its consequences are frequently underestimated. The state, particularly at local level, is a collective enterprise in which we all have a stake. We pay in, and in return, a range of essential services is provided. From schools to street-cleaning, from parks to social care, from child protection to bus services [2], from waste disposal to highway maintenance, local government provides the glue that keeps society together. It provides these services at cost. In other words there are no shareholders wanting a dividend.

As a society we have become used to having public services provided for us. We really don’t want to pick up the litter ourselves, take all our waste to the central depot, fill in the potholes in our road. We can’t all afford to send the children to fee-paying schools, so the availability of a state-run service is essential.

What we’re less good is understanding that these services have to be paid for. The low-tax brigade would argue that all these services can and should be provided by the private sector, with the result that we’ll pay on an item of service basis. Of course then we’ll pay more, because these services are fragmented and need to be run at a profit for the shareholders (not to mention high executive salaries). The contention that handing over public services to private companies leads to competition which will drive down prices can no longer be taken seriously, as one glance at the energy and rail transport sectors will show.

This is not an assault on private businesses. They are essential for providing occupation and innovation and will always, I hope, be with us. The criticism is of the privatisation of services that are best run in the public or social enterprise sector. What is lost through privatisation is the key idea that public services are in effect a community insurance scheme: we don’t need all the services all of the time but they are there when we do need them. And because they are universal services, there are economies of scale – and so reduced costs – in providing them.

It’s through this prism that we should view income tax rates. Not as a tax, but as a payment for communal services that we all need at some time or other. Those services cannot be provided at no cost.

All the main political parties in England (except the Greens) believe we must continue cutting public services to reduce the annual deficit.  In December the Chancellor insisted that the UK will have a surplus of £23bn by the end of the decade provided public spending is cut in line with government plans. The trouble is, as the OBR and others have pointed out, the squeeze implied by those plans will be so severe that many public services will cease to exist in any recognisable form before then.

The Institute of Fiscal Studies has developed a tool to enable each of us to play at being Chancellor: its guideline is that 1p on all rates of income tax would generate about £5.5bn in a year [3]. Adding that 1p would more than compensate for the cut of £3bn in the government’s revenue support grant to local authorities in England in 2015/16 and subsequent years. It’s not going to wipe out the deficit – expected to be over £70bn in 2015/16 – but it would lessen the severity of the short-term expenditure cuts.

No one will like an increase in income tax. But it is a progressive tax in the sense that it is directly linked to ability to pay, and so unlike VAT which hits everyone irrespective of means. The question for us all is whether we want to see filthy streets, transport subsidies cut, care homes closed, youth services decimated and the rest of it, rather than stump up a 1p tax rise.

But the politicians won’t let us answer, or even ask, that question.

Notes

[1] OBR Economic and Fiscal Outlook, December 2014, paragraph 1.7 http://cdn.budgetresponsibility.independent.gov.uk/December_2014_EFO-web513.pdf

[2] Yes, publicly-owned bus companies still exist, see http://en.wikipedia.org/wiki/Municipal_bus_company

[3] http://election2015.ifs.org.uk/how-would-you-balance-the-books

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