Tax cuts are all the rage, but they can either be a short term sticking plaster (followed by a hefty bill) or the beginning of a concerted effort to balance an inherently unfair system. I know which I’d prefer...
This week saw all three of the main political parties proposing, or at least hinting at, cutting taxes. David Cameron wants to give tax breaks worth £2,500 every time a business takes on a member of staff who has been unemployed for three months or more. He argues the plan is self funding because the government would save money on benefits.
However, there is a serious hole in his argument. Businesses are shedding staff, not taking them on. Virgin Media has announced plans to cut 2,200 jobs, Vodafone has told the world it will cut costs by £1bn, Yell is to cut jobs by 1300, the list goes on... Meanwhile the latest unemployment figures showed 140,000 more people out of work, shoving the total to an 11 year high of almost two million. In the face of those stark figures, Cameron’s plan smacks of fiddling whilst Rome burns.
Equally, it does nothing to put new money into the economy so is not, in fact, the ‘fiscal stimulus’ that is required. That fiscal stimulus is the key point. All this talk of tax cuts is driven by the need to put more money in the pockets of ordinary people so we can all spend our way out of recession. But what if we all decide that, rather than spending any windfall coming our way, we decide it’s better to save it? That would be no help to the economy and any gains made by individuals would be more than eaten up by inevitable tax rises to balance the books once the economy recovers. That is a question for another day as clearly the pressing issue now is to mitigate as far as possible against the depth and damage of the recession that is upon us now.
For his part, Brown seems to be hinting at a tax cut funded by more public borrowing. We will not find out exactly what his plans are until next week at the earliest, when the Chancellor’s pre-Budget report may be made public. The obvious strategy would be to cut taxes for low and middle-income families, simply because they would be more likely to, through necessity, spend the tax savings rather than stick the money in savings accounts. That means more money flows directly into the economy, which would be the whole point. It also seems likely that the government will dump its hugely unpopular proposals for a hike in road tax.
If Brown and Darling do go down that road, it will certainly be a bold move, and not without risk. Presumably, that is why Brown wants a globally co-ordinated approach to tax cuts – to reduce the UK’s exposure. The fact remains though that any money we borrow now will have to be paid back in the end – and guess who will foot the bill...
For my money, Lib Dem Deputy Vince Cable talks the most sense when it comes to tax cuts. To be fair to him, he has been calling for a cut in income tax for less well-off families for some time. Most interesting of all, though, is his desire to see any moves on taxation form part of a concerted and long term strategy to reframe our tax system – to make it fairer for everyone. Overall, the government would still get the tax revenues, but those with the means would be forced to pay their share.
He’s right, our tax system isn’t fair, and the numbers tell a pretty depressing story. At the moment, the UK’s poorest people lose almost 40% of their income to tax, whilst the richest pay only 34.8%. That’s not right, and it’s not fair and it should be fixed, recession or not. Meanwhile in 2005/6 25% of the UK’s largest businesses paid no corporation tax. In an economy where small firms account for 99% of businesses and do pay tax, that is also deeply unfair.
Cable’s plan is to cut income tax by 4p for the lowest paid, and pay for it by shoring up the tax loopholes that the rich have been using for years (for a start, if millionaires like Lewis Hamilton want to go and live in a tax haven to avoid paying their share, they should be told not to come back – my words, not Cable’s).
Sadly of course, the LibDems remain a distant third in the opinion polls, so Cable’s bold plan may never come to fruition, unless either Brown or Cameron nicks it (not for the first time), which is a shame. Personally, I’d like to live in a fair society and every cloud should have a silver lining.
