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Artillery Row

Fiscal fibs

Beware Tories promising tax cuts

Everyone and their uncle in the Tory leadership contest is promising a smaller state and lower taxes. Well that’s very nice, but given that the Conservatives have been in power for the last 12 years, you have to wonder just where they have all been during that time. 

Every time there’s a Tory leadership election we see a bizarre, tragicomic scramble to pretend that whatever previous government they’ve been baying support for up until yesterday was nothing to do with them. Taxes too high? Nanny state breathing down our necks? Woke public servants raging across every institution? Nothing to do with us, mate. 

It’s a neat trick being both in power and in opposition, a sort of ministerial black box containing Shrodinger’s government. Nobody knows what’s going on inside of it, but at least you can hold out hope that someone is being heavily irradiated (top tip: don’t open boxes of chocolate sent from Russia). Other than a meteorite landing on parliament there’s not much else to hope for in British politics. 

It’s not just that this is a cynical ploy (though it’s certainly that), it’s that it creates a debate which at no point connects with reality. The question we should be asking leadership hopefuls is not whether we should cut taxes but how. 

Driven by inflation and recession, taxes as a proportion of GDP have risen to the highest point they’ve been in 70 years. What that should tell us is that the tax burden is not a pure instrument of government whim, it’s subject to economic forces well beyond the ability of politicians to easily control at the flick of a policy lever. 

Nor is tax a monolith. “Cutting taxes” sounds nice, but which taxes, and on who? This is not the usual progressive wail about how we need to tax the rich and not the poor. In fact the hardest hit in the modern tax system are not the very poorest and least educated (who thanks to consistent cross-party policies have largely been lifted out of income tax brackets), but young, middle class professionals, especially those working and living in London and the Southeast. Already, a graduate earning more than £27,295 will pay a marginal tax rate of 42.25 per cent, compared with 33.25 per cent for his non-graduate counterpart.

Consider also that people living in London are massively more likely to have a degree than people anywhere else in the country. London wages (including public sector salaries) are adjusted to reflect the higher cost of living in the capital — but tax bands are not. The young are taxed for getting a degree, then they’re taxed for getting a job in London. But that trajectory is what is recommended to them in every school, in every household. Get a good degree. Move where the jobs are. 

This is a direct tax on social mobility and economic opportunity. If you stay in more economically depressed areas, take lower paying, less productive jobs and don’t get a degree, you’re rewarded by the tax system. If you try to better yourself, you’re punished by it. The advice from the current government might as well be “get off your bike”. 

Older people are disproportionate beneficiaries of NHS spending

We may sympathise with the very poorest being lifted out of tax, but what about the other population that’s underrepresented in the tax system? Pensioners (and older assert owners in general). 

Not only are pensions themselves subject to numerous forms of tax relief, but tax relief is available in every area of life and policy. Selling your home, which in our current housing crisis can generate vast windfalls, is not subject to capital gains. And those, like many older people, who invest money into a larger property portfolio by renting out a second home (or more) are still only paying the relatively lower capital gains tax on their passive income, not the much higher rate of income tax that falls on the shoulders of workers. 

Older people (who now live longer and longer) are also the disproportionate beneficiaries of NHS spending and the time of NHS staff. On top of this they receive a myriad of smaller benefits such as free bus passes, free TV licences, a winter fuel allowance and cheaper prices in many areas of life. 

The idea that all this is simply a reward for a lifetime of hard work, carefully earned and saved, is a fanciful myth not rooted in reality. Public pensions have long since ceased to be a form of social insurance, and are funded from direct taxation. The proportionate burden of older people on younger generations is vastly greater than that which such older people experienced in their own youth, not only because they are living longer but also because they have had fewer children. 

Which brings us back to tax. Even quite a large tax cut — say five per cent on middle incomes — would not be enough to offset our de facto graduate tax, or the inflated tax burden of people living in London. It would however starve the treasury of funds at a time when the question of how we can afford anything has become existential. 

The cost of borrowing has considerably increased, meaning ambitious programs of both left and right to cut taxes or spend more are out of the window. But spend the government must, because we are facing an economic crisis that affects both individuals and businesses. Not only will ordinary people need government assistance to prevent far worse downstream consequences — such as intergenerational poverty, crime, worse health outcomes et cetera — that will end up costing even more, but the economy itself must be rescued. 

Conservatives dislike the idea of economic intervention, but even the most hardened free marketeer must admit that the British economy, full of rent-seeking capitalists and a growing class of petty landlords, is not a dynamic capitalist machine generating innovation and opportunity. Changing that will mean drawing on state power, and shifting the way resources are allocated. 

The industries of the future must be fueled somehow

Reform is possible. We could embrace a pro-growth agenda, make our welfare system sustainable and re-open economic opportunity to the young. But to do that will require a mass slaughter of British sacred cows. 

The right will have to get used to direct investment in the economy. Housing, including social housing, will need to be built on a large scale. A dearth of innovation and investment for new enterprises will require government help and subsidy to correct. In a volatile world, British industries will need some measure of protectionism to avoid being outsourced, sold off or simply outcompeted by less scrupulous global actors. 

The left will have to swallow some equally bitter pills. Net zero has to go. Never mind that we’re in an economic catastrophe and simply can’t afford it — it’s also bad ecology. Britain only produces two per cent of global emissions. Disproportionately high, perhaps, but not enough for even full carbon neutrality to make any difference to climate change. Britain’s opportunity here has always been in innovation — the “green industrial revolution” that we’re constantly being promised. 

But industrial revolutions, even green ones, require steel, nickel, lithium, cobalt and copper. They demand cheap electricity and heating. They need container ships, trucks and planes. Polluting, backwards looking industries must be phased out, but the industries of the future must be fueled somehow. Long term, we can produce a zero-carbon energy grid and find alternatives to gas to heat our homes. But the idea that a limping, deindustrialising Britain is going to pull it off is for the birds. 

As well as a cost of living crisis, we have an energy crisis. Even apart from artificially hiking up the cost of power and heat, global conditions will see bills go up, impoverishing individuals and suppressing economic growth. Combine that with an increased cost of borrowing and Britain is running out of cash and power. We no longer have the luxury of turning our nose up at ideas like fracking. Is it good for water tables, or the planet? Possibly not, but it’s hardly cataclysmic. 

Even if it takes time to get off the ground, committing to it would bring confidence and investment, and help us keep bills under control with the promise of a future windfall. Like North Sea Oil before it, it can not only bring down energy costs, but provide cash when it’s most desperately needed. A proportion of the profits from fracking could, like the oil wealth of Norway, be put into a sovereign wealth fund, but in our case dedicated to investing in the new green economy. 

Some sacred cows will simply outrage everyone. As our population ages, older people will need to take on more of the cost of their own care, with accumulated assets used to pay for it. The needs of our health and social care system are now more than can be reasonably funded from taxation alone, and we must contemplate public insurance and private investment in order to build capacity and promote a diversity of providers, much as is the case in Germany. 

Student debt must be subject to heavy relief, and our covert graduate tax abolished. However at the same time low value degrees and courses, as well as oversized universities, will need to go. Not everyone needs to go to university, and those who do need not go for as long as three years, do so on a full time basis or move away from their home town to get a higher education.

Finally, as well as directly building houses, second homes and unused land must be targeted. A variety of laws can help effect this, but one of the simplest, and a further crucial source of revenue, is a Land Value Tax, which incentivises development and helps shift the tax burden from producers onto rent-seekers.

If any of the above sounds radical or implausible, consider the brick wall that we are all about to drive into otherwise. How much further can costs increase on young people in London before they move out to lower paid, less productive jobs in the regions? How long can the government sustain spending as the cost of borrowing increases and inflation reduces its purchasing power? How will the British economy survive any of the above? Tax cuts don’t cut it — we need a revolution in tax and everything else. 

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