Sunday, May 23, 2004
No early release from the shackles of higher tax
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

TAX is rumbling away again as a political issue. In next month’s local elections the government looks likely to get punished both for Iraq and big rises in council-tax bills.

Indeed, it already is being punished. Professors Colin Rallings and Michael Thrasher of the University of Plymouth put Labour on only 27% of the vote in recent council by-elections — neck-and-neck with the Liberal Democrats and 11 points behind the Tories on 38%. The last time Labour did this badly locally, Michael Foot was leader and a fresh-faced Tony Blair was making his first tentative political steps fighting the unwinnable seat of Beaconsfield.

Tax is also rumbling when it comes to petrol prices, with Gordon Brown under intense pressure to abandon the excise-duty increase (of between 1.4p and 1.9p a litre) due to take effect on September 1.

On this, the government has been caught crying wolf. When there were national fuel protests in September 2000, ministers claimed that high forecourt prices were explained by the global oil market. In fact, big increases in duty were mainly to blame. This time, the culprit really is the oil market but road-users are more inclined to pin it on the Treasury.

But tax in general is not as big a political issue as it might be. Taxes have gone up significantly and, according to most economic forecasters, if not the Treasury, they will need to rise again in the next parliament if the chancellor is to meet his golden rule.

Tax freedom day — the point in the year at which we stop working for the government and start working for ourselves — is getting later. This year, according to calculations by Gabriel Stein for the Adam Smith Institute, tax freedom day will come next Sunday, May 30. It would be a day later if this were not a leap year.

When Labour was elected in 1997, tax freedom day was May 25. Under the “old” Labour chancellorship of James Callaghan in 1964, it was April 23, more than a month earlier.

To be fair to Brown, May 30 is not a record. Tax freedom day has been as late as June 15. That, surprisingly, came in 1982 under Margaret Thatcher, when the high taxes of the 1970s were compounded by the austerity budget of 1981. Even so, taxes are rising and tax freedom day is again getting later.

Higher taxes, meanwhile, are not producing a discernible improvement in public services. Polls show voters are highly sceptical about ministerial claims that extra cash is transforming health, education and other services. A poll for this newspaper last weekend showed in net terms people think the NHS has deteriorated since 1997.

That probably goes too far. But it is fair to say that any improvement in the NHS and other public services has been well below people’s expectations. And it is certainly the case that any improvements coming out have been meagre in relation to the extra funding going in.

The government hates figures showing that over one period a 20% increase in NHS funding led to only a 2% increase in treatments, or that productivity in health and education has fallen by 15% to 20% since 1997. These, too, overstate it but chime in with the overall impression that taxpayers’ money is not being well spent.

So why isn’t there more of a revolt on taxation generally? And why, despite their likely successes next month, aren’t the Tories doing better? Last week I chaired a session at the first Political Economy conference to be held by the Institute of Economic Affairs, in which Oliver Letwin, the shadow chancellor, came under pressure over the Tories’ fiscal plans.

Why, the question was asked repeatedly, was the party not being more radical when it came to tax cuts and reining back spending? Several interesting points came up. Letwin himself noted that 2004 is not 1979, the last time the Conservatives dislodged a Labour government. Then taxes were demonstrably too high, with a top rate of tax of 83% (98% including unearned income) and a basic rate of 33%, and voters were crying out for relief. This time, while there is tax pain, it is not intense and is offset by other gains, for example low mortgage rates. The pips are not squeaking.

This, indeed, helps to explain another point. If taxes have been going up why, when the evidence would suggest this damages economic performance, has the economy been doing so well? The answer seems to be that the benefits of economic stability, deriving partly from Bank of England independence, have combined with the flexibility established before 1997. So far these have more than outweighed the damage caused by higher taxes.

Letwin also explained why the Tories have felt obliged to match Labour pledges on health and education spending, while at the same time criticising government waste. Only by matching Labour’s funding, he argued, could the Tories direct the debate to their reform plans. I am not at all sure about that.

When money is being wasted, and NHS funding is rising by more than 7% in real terms each year — an amount even Derek Wanless, the government’s own adviser, said probably couldn’t be spent wisely — voters are entitled to an alternative from the opposition.

There is another point. At some stage during the Tories’ last years, the political pendulum swung away from tax cuts and in favour of public spending. It is starting to swing back but has not yet got there. This is compounded by changes in the distribution of tax, pointed out by another panellist at the conference, David Smith (no relation) of Williams de Broe, the broker.

The top 10% of income-tax payers account for 52% of receipts. Those who benefit most from higher public spending are not paying the taxes to fund it.

All of which means that, while taxes are starting to rumble as an issue, we are still some way from a political tipping point. And the tax burden will carry on rising.

PS: I could give you something here on the Bank of England’s hawkish minutes, in which the monetary policy committee voted 9-0 for a rate rise this month and set the markets thinking hard about a June increase. Like the MPC, I shall wait for more data before declaring my hand on this. I could say more on my informal economic indicators but there will be time for that soon.

Instead, let me share two bits of research from the new Economic Journal, published by the Royal Economic Society. One answers the age-old question — do we order more when we split a restaurant bill with friends, or the same as if paying for our individual orders? The answer, based on experiments by professors Uri Gneezy, Ernan Haruvy and Hadas Yafe, is that we spend least when paying for only our own consumption, about 50% more when dividing the bill with friends and twice as much when somebody else is picking up the tab. Perhaps there is such a thing as a free lunch.

An even bigger question is answered by Professor Nick Crafts of the London School of Economics. He asked whether steam power had a bigger effect on economic growth than computers. James Watt’s invention undoubtedly boosted growth, its biggest impact coming in the period 1850-75 when it contributed 0.4% a year to labour productivity growth in Britain. One problem for steam, though, was slow take-up.

Computers, in contrast, have been rapidly diffused through the economy as prices have fallen — by 2000 the cost of a standardised computing operation was a billionth of its 1950 level. By the 1980s, computers were contributing 0.7% a year to American productivity growth, rising to 1.8% by the late 1990s. That little PC on your desk is more powerful than a steam engine.

From The Sunday Times, May 23 2004

Comments

You Can't have it Both ways on Tax.

So the Rich are complaining they are not getting the full benefit of their taxes are they?

Consider this m'lud.

The reason taxes are higher is because people (including the rich otherwise they wouldn't have supported Mr Blair quite as much) want better public services like Health and Education. These services (hopefully) will produce a higher quality Human Capital (if I can call it that). Now the top ten percent of the population are most likely the employers of this Human Capital and therefore profit in its use, becuse their companies (combined with more flexible labour laws) make more money (go on, tell me I'm wrong.. please). Therefore they should really consider it an investment and not a burden.

OK, so if they stopped paying taxes like they do now, what will happen? Well, Mr Brown could borrow a lot of money (ala Mr Bush - where woulde HE be now without the Japanese). That would eventually cause rates to rise, so I expect the Rich would feel the pinch there. Also ,they would start to have less productive employees and (possibly) get mugged, so their overall quality of life would suffer - unless you want to live in a gated community that is.

Thank you very much, case dismissed!

JMS

Posted by: James Saunders at June 3, 2004 01:41 PM