In my first blog piece on taxation, I spoke of the system in a more philosophical and idealistic tone. Whilst idealism and philosophy can never be ignored, it is also worth evaluating taxation in a more present day and practical way. Is there a ‘best’ way of taxation? Should taxation be the art of “plucking the most amounts of feathers from a goose with the minimal amount of hissing”?
Once again, I stress that I’m not an economist, and I welcome budding economists to offer theoretical analysis, especially when it comes to taxation. However, my own view is that the right balance needs to be struck with taxation. Let’s look at two extremes; one in the UK, one in the USA. Before Margaret Thatcher came to power, the top rate of tax in Britain was as high as 83%, far too high an amount, and surely an incredibly unproductive tax. If you follow the link below, you will see an illustrative example of ‘The Laffer Curve’, a theoretical representation of the relationship between government revenue and taxation, and all possible rates of taxation. When applying the 83% rate, you can see quite clearly that it is not fulfilling its purpose of raising maximum revenues:
Thatcher rightly cut this burden over her premiership, no doubt leading an influx of returning businesses and entrepreneurs to Britain (it’s highly unlikely that many people will have been prepared to stay and pay this rate of tax). However, she raised indirect taxation at the same time, something I will come to later.
On the flip side, George Bush (Junior) initiated vast and long lasting tax cuts over the course of his Presidency for the super wealthy, just when he had inherited a stable and growing economy from the fiscally cautious measures of President Bill Clinton. Having been bequeathed a budget surplus, Bush quickly turned it into a deficit, with his tax cuts coming at the same time as wars in Iraq and Afghanistan; the national debt in the USA is estimated to be as high as $15 trillion. The typical conservative response to this would be that Bush’s tax cuts encourage wealth and business (which had hardly been doing shabbily under the Clinton administration). In that case, it’s best to hear from Warren Buffet on the issue, one of the richest men on the planet:
"My general theory is that you should have a tax system where those making millions and millions of dollars, who are paying a much lower rate for one reason or another, get moved up to the rate that people think they are paying, in the mid 30's. There are about 80,000 taxpayers within that group paying that lower percentage of taxes. I would move those people up...my friends and I have been coddled long enough by a billionaire-friendly Congress".
"My general theory is that you should have a tax system where those making millions and millions of dollars, who are paying a much lower rate for one reason or another, get moved up to the rate that people think they are paying, in the mid 30's. There are about 80,000 taxpayers within that group paying that lower percentage of taxes. I would move those people up...my friends and I have been coddled long enough by a billionaire-friendly Congress".
In my opinion, looking at both of these examples presents dilemmas; tax too highly, and you lose revenue and drive people to tax havens; tax at too low a rate, and you create a yawning budget deficit, and you can do serious harm to social mobility. Buffet has also said in the past that he pays a lower percentage of his income than his secretary; it’s not hard to see why people in America are so enraged at the inequities that are purported by Congress, and the Republican Party in particular. So much for Bush’s “compassionate Conservatism”, and the global recession of 2008 meant that his tax cuts’ so called aims for growth were not being realised.
Coming back to Thatcher, whilst her cutting of the tax burden at the top was a wise move, her increases in VAT (indirect taxation) could well be considered a regressive measure. VAT disproportionally hits the poor far more than the rich, as the poor pay a greater percentage of their income in tax than the rich do. VAT rightly exempts essentials such as baby clothes, milk and bread, but it makes the current “we’re all in this together” message very hollow. Should Governments, especially when inheriting a precarious financial position, do their best to maximise revenue by raising VAT, or should they cut VAT and hope for an increase in consumer spending?
With the 50p tax rate currently out of the news (for now), the focus has again been on helping those at the lower end of the income scale. Nick Clegg has spoken of his desire to speed up raising the personal allowance threshold (which will be at £10,000 by 2015), in order to help out families which Ed Miliband frequently refers to as “the squeezed middle”. This should rightly be applauded, but as with Clegg’s desire in the past for the public to have shares in state owned banks, it could fall upon deaf ears. I believe Clegg is genuine in wanting the process to be sped up, yet it could be more of a symbolic move, as ultimately George Osbourne has the final say at the Treasury. It is likely that Osbourne will decide on the issue based upon whether there is financial leverage to do so, but I believe Clegg’s calls are a necessary measure which should not be vetoed due to a matter of economics. At the 2011 Liberal Democrat Autumn Conference, Chief Secretary to the Treasury Danny Alexander spoke of raising the income tax threshold to £12,500 as a centrepiece for the 2015 Lib Dem Manifesto. I absolutely applaud this measure. In one of my previous blog pieces, I spoke of one of my idealistic aims of raising the threshold to £15,000, and this proposal certainly goes a long way towards that goal. By setting the threshold at £12,500, everyone on minimum wage would be exempt from paying income tax altogether. The fact that it has been seriously considered is a positive sign that such an ambition, be it £12,500 or £15,000, it not implausible or impossible.
Not only would this measure be a huge symbol of fairness, but it would massively increase the incentive to work, and would reward those who work long hours and receive little recognition. Furthermore, purchasing power could increase as a result, as people would be left with more disposable income; for the economy to grow, consumerism needs to develop at the bottom, not just at the ‘trickled down’ top. Furthermore, it would help to boost the progressive credentials of the Liberal Democrats whilst they are unpopular Coalition partners; the Labour Party are yet to devise such a radical and fair model. With regard to the 50p tax rate, the issue will eventually rear its head again, most likely at the 2015 Election; the Conservative Party will want to pledge to cut it. I have already spoken of my opposition to its demise, but accept that hard evidence in economic terms could counter my argument. Whilst I strongly believe that the 50p rate is both fair and viable, I believe there should be a progressive alternative should it be seen fit to cut it.
A ‘Mansion Tax’ was in the 2010 Liberal Democrat Manifesto, and it proposed a 0.1% levy on houses worth over £2 million (the original plan was on houses worth over £1 million). Such a tax would make those “with the broadest shoulders” (David Cameron’s words, not a raging Lefty) pay their fair share, but in a more indirect way (Margaret Thatcher was certainly no stranger to raised indirect taxation). Such a tax would not just be for the sake of it, but it could raise valuable revenue whilst also symbolising fairness. I believe the Mansion Tax is a fundamentally good idea, and would be a fair compromise between the opposing sides with regard to the 50p tax. If the 50p tax was abolished, perhaps the threshold for the Mansion Tax could be lowered to £1.5 million or even £1 million; a 0.1% levy is hardly crippling. Abolishing the 50p rate and not having a progressive alternative such as the Mansion Tax is both wrong and unjust.
Returning to the issue of indirect taxation, Council Tax has proven to be a regressive measure. Whilst better than Margaret Thatcher’s hugely unpopular and unfair Community Charge (better known as the Poll Tax), it still does not take in to account people’s income. A family of four in a modestly sized house could have both wage earners made redundant in these hard times, yet due to the value of the house and having two children, their Council Tax would be considerably high. It is an issue that has not been properly addressed since the Rates system was abolished by Thatcher. I believe a comprehensive review needs to be put in place to evaluate the merits of Council Tax, and whether there can be a better and fairer alternative; many households are hit hard in the best of economic times by Council Tax.
To conclude, I believe the ‘best’ way of taxation (if there is such a thing) is to find the right balance. The tax system needs to be both economically viable (taxation levels prior to Thatcher were far too high; Bush could not fund his irresponsible and unnecessary tax cuts) and fair (retain the 50p tax, or provide a progressive alternative). Tax becomes a more important issue than ever when there is a stagnant economy; measures must be taken to increase the threshold quickly to £10,000 and beyond. VAT is a fundamentally regressive measure, and should be kept low wherever possible. When cutting a deficit, tax increases have to be made as well as public spending cuts, so perhaps raising VAT to 20% is necessary in order to maximise revenue (for now). However, there needs to be restraint at the top too; it is not a just world when people at the bottom are suffering whilst those at the top feel a small splash in the ocean; keep the 50p tax, or introduce a Mansion Tax. The economy needs consumer spending to get it going again, so if VAT is to be increased (which will affect purchasing power), then speed up tax cuts at the bottom to provide more disposable income.
I don’t think it’s possible to pluck “the most amounts of feathers from a goose with the minimal amount of hissing”, as people will never truly be 100% happy with the amount of tax they pay. Therefore, viability and fairness need to be the overriding themes when addressing the issue. Legislators in Government should therefore act on this, and act on it without referring nervously to their trade union or tax evading paymasters.
-Ben
links for Warren Buffet quotes: http://www.marketoracle.co.uk/Article32766.html and The Guardian
links for Warren Buffet quotes: http://www.marketoracle.co.uk/Article32766.html and The Guardian
