Tax cuts are not only possible but vital

Tax cuts are not only possible but vital

by Brian Monteith
article from Thursday 1, April, 2010

 WHETHER or not Winston Churchill was the greatest Briton is a debate that will live for as long as history is written, but one thing beyond doubt is that he had a knack for summing up a complete argument in a bon mot.

For me there is no better example of this than when he said "for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle".

What a pity Alistair Darling did not consider this when he crafted his Budget last week – and what a pity that neither George Osborne nor Vince Cable fully understands the message that Churchill gave and are both unwilling to be more open-minded towards reducing our taxes as a way to increase revenues and tackle our debt mountain.

It appears that because we are in a recession and government money is so tight that there is no opportunity to consider reducing the heavy taxes that the public endures.

This is somewhat baffling for the same message about the nation not being able to afford lower taxes was made by the same politicians when money was easy.

The truth must be that at no point do our politicians really believe that there is a right time to reduce taxes – for them our money is their money and only if it might be fashionable or a way to win votes will the offer of a tax reduction be made.

The recent debate between the Chancellor and his shadows offered little hope for tax reductions either now or in the long term. I find far more encouragement reading the TaxPayers' Alliance Manifesto than I do reading anything the potential occupants of No 11 Downing Street have to say.

Liberal Democrat Vince Cable's partisan and patronising dismissal of Conservative George Osborne's commitment to reverse the Labour government's planned increase in National Insurance contributions was especially dispiriting. I had rather hoped that he would support the Conservatives in resisting this back-door tax increase rather than try to score points about who is the most intelligent beast in the jungle.

NI increases are not so much a sugarcoated pill as just a different shaped pill and we need to stop taking them altogether.

Increases in National Insurance have become nothing other than an income tax increase by another name under this government while Labour's other favourite method of tax increase – the freezing of tax allowances and thresholds – can hit us in the pocket just as much as a straight penny on the pound rise can.

For a government that finds it so easy to say it is committed to fairness and social justice where is the fairness in taxing jobs so they are more expensive? It is new private-sector jobs that are going to help us trade our way out of the recession and there's nothing fair or just about making it more expensive to create them.

Where's the social justice in making the personal tax burden more expensive so that the incentive to work or work harder is reduced and the redistribution of hard-earned pay to those who have no inclination to work is increased?

Gordon Brown and Alistair Darling paint the Conservatives as bloodthirsty mad axemen who cannot wait to cut public spending so they can abolish inheritance tax and cut personal taxes. I wish it were true.

Sadly, the Conservatives biggest fault is their past lack of moral courage towards advocating a low-tax system that would benefit everyone but especially the low paid.

Language is vital in politics and the Conservatives under David Cameron allowed themselves from 2005 to be succoured into avoiding any mention of cutting taxes, this was a wrong turning that still influences how the Conservative leadership thinks and speaks.

By changing the emphasis away from cutting taxes that might be seen to benefit the wealthy towards reforming our tax system so that the lower paid would benefit the most would have allowed them to come out as the people's champions and occupy the moral high ground of social justice to which Labour pays lip service.

By offering to reform rather than cut taxes through a radical realignment of who pays tax – by, say, taking out of tax anyone who earns less than £12,000 per annum, the Conservatives could have shown that they were on the side of the ordinary people rather than the high-rollers. There is no sense, no morality and no economic case for taxing people and then giving them means-tested benefits to top up their salaries.

Countries throughout the world have been introducing flatter taxes that reduce evasion and discourage avoidance (dubbed avoision by the late Arthur Seldon) because their systems are simpler and there are fewer tax shelters and allowances to distort behaviour. The costs of such schemes are found by greater revenues and reduced cost of collection – so the much feared public sector cuts are no different from those being advocated to tackle the debt crisis.

Flat taxes used to be an exotic concept used only in small refuges such as Hong Kong, Jersey and Guernsey and, while successful in such limited settings, were seen as unsuitable by economists and politicians for larger industrialised countries that carried a welfare state and a benefit system.

That has all changed in the past ten years, with many countries making their tax systems flatter with one relatively low rate, few exemptions and high starting thresholds so that the low paid don't pay tax.

The first nation to adopt the flat tax was Estonia in 1994 and its neighbours soon followed. In Russia, a 13 per cent flat tax was implemented in 2001 and saw income tax revenue rise 25.2 per cent in real terms while in 2002 it was up 24.6 per cent and in 2003 a further 15.2 per cent. It is likely that some of Russia's revenue growth came from attracting people who once avoided paying tax, legally or illegally, to become taxpayers; but so too has it encouraged existing taxpayers to work harder and grow the economy.

In Britain, we have too many people, rich and poor, who seek to avoid tax by living in the black economy or living abroad.

Reforming our tax system would create greater incentives to increase prosperity when we need economic growth most, and encourage many who have been leaving our shores to return and become British taxpayers.

Brian Monteith is Policy Director of ThinkScotland

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