The Laffer curve shows the points beyond which increased taxation reduces the revenues obtained (i.e. people start finding ways to avoid payment).
Edward de Bono: I Am Right, You Are Wrong. Penguin, 2009
UK Tax system
The way our political system and national conversation are constructed make it close to impossible for a leader to say anything sane about tax.
The right claims that tax in principle is immoral, coercive, anti-enterprise, anti-aspiration and always economically destructive: this now sets the terms of discussion, policed by our rightwing media. The consequence is that our tax system is now so badly distorted that it threatens the social fabric.
The British residential property system creates unreal house prices and huge social unfairness with huge mortgages for the young, the lottery of property inheritance and high rents. Property is effectively only taxed when bought and sold. Residential property prices (on which council tax is based) was last reviewed in 1991. Generous inheritance tax thresholds, tax exemption of capital gains on homes and trivial council tax receipts, mean the property market is the world’s biggest onshore tax haven creating the world’s highest real house prices. No proposal for change seems possible.
Public services, after seven years of drastic cuts, have reached a point where severe deterioration is certain if planned reductions go ahead. The condition of Britain’s prisons is already intolerable: the stress in the NHS is apparent to all; improvements in educational standards are being reversed. All, starved of resources, can only get worse.
The “triple lock” – outlawing rises in income tax, national insurance and VAT (the major revenue streams in any tax system) constrained the ability of the government to manage the economy flexibly, and as virtually every observer notes, the triple lock is economically absurd.
Yet health and education spending – from which everyone should benefit and thus paid for by taxation – have been rising consistently for over 60 years, as they should and will. To try to turn back this growth or, alternatively, the social security system to find the necessary resources, is to ignore reality. Other cancelled proposed increases (insurance and airline taxes, national insurance for the self-employed, and probate fees) were means to raise revenue but would only have created further distortions.
"Britain must create a tax system that raises revenue across a broad base as fairly and with as little economic distortion as possible and it must accept that if it wants health and education to remain public goods financed by general taxation, along with a reasonable social security system, then taxation will have at the very least to remain around 35% of GDP and may even have to rise a little."
The tax take must increase, but it will need to be drawn from a much wider base than just on the “rich” – the top 5% – earning over £70,000 or from big corporations; there just is not enough potential revenue from those sources.
A smarter strategy would be to acknowledge that tax is the price for living in a civilised society and making the major tax revenue streams off-limits is crazy. We also have to go much further within a fair framework if we want decent public services and be able to manage the economy flexibly.
- The broader the tax base, the lower tax rates need to be.
- Revalue domestic residential property and overhaul council tax as part of a wider review of how local government is financed.
- A fair tax on inherited wealth.
- A broadening of the VAT base, with an extension to financial services.
- Heavier taxes on environmentally damaging activity.
"Britain could have high quality public services, a great environment and a functioning housing market – and very few would notice the difference in their taxes. A country on the rise would do this in an instant. It is a declining country in thrall to rightwing ideologues that finds it impossible – that will be Britain in spring 2017."
Will Hutton: Overhaul Britain's rotten tax system or we won't be able to sustain a healthy state. The Guardian, 22 April 2017
