Sunday, September 12, 2004
The burden of Brown is a taxing matter
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

Gordon Brown, I understand, was planning a quiet return to work last week, with no big dates in his diary. Events, however, intervened in the form of hand-to-hand combat with Tony Blair over the shape of the cabinet.

Each time one of these tussles is played out you wonder how much longer this odd couple will be able to work together. Will the future see Blair go on and on as prime minister but without Brown as chancellor? Or will Brown finally succeed in displacing his neighbour?

And you also wonder about tax. Underlying the Brown-Blair tension, from the very start, was the issue of whether a Labour government should push up the top rate of income tax to 50%. Blair said no, arguing correctly that it would send entirely the wrong signal to aspirational voters thinking of supporting Labour. Brown mumbled and grumbled and went about redistributing the tax burden in other ways, through complex tax credits for lower-income groups and stealth taxes on higher earners.

According to one set of calculations doing the rounds last week, the chancellor has been spectacularly successful in that aim. Smith & Williamson, a firm of accountants, suggested that taking into account both direct and indirect taxes, the tax burden on a £50,000 earner has risen from 35% to 50% since 1997. For somebody earning just over £30,000, the burden has risen from 33% to 38%, it said.

My reaction on seeing the figures for the £50,000 earner was that they were not credible. The tax burden has risen, but not that much. Only by assuming that our guinea pig bought a house in 1997 and did so again in 2004 — incurring the full weight of Brown’s stamp-duty increases — did Smith & Williamson get to its numbers. On that basis, assuming “Mr£50,000” stays put next year, his tax burden would plunge.

Leaving out stamp duty from the calculations gives an increase in the tax burden from 32% to 35.1%. Smoothing the increase in stamp duty produces a rise from 32.4% to 37.1%. Apart from stamp duty, the other significant increases are in income tax, National Insurance and council tax.

A rise in the tax burden on a £50,000 earner of between four and five percentage points feels about right. On the same basis, our £30,000 earner has seen his or her burden go up from 31.1% to 33.2% of income. One proviso about such calculations is that some of Brown’s tax rises are impossible to allocate to individuals.

While the £5 billion annual raid on pension funds will have a big impact on people in the long run, that impact cannot be worked out with any precision now.

This appears to be the season for thinking about tax. In recent weeks the Institute of Public Policy Research has floated the idea of a 50% top rate of inheritance tax, partly offset by a lower rate for “middle income” estates just above the £263,000 threshold.

We have also had the Fabian Society calling on Blair and Brown to re-open the debate over a 50% top rate of income tax. The Fabians, like others in the Labour party, are dismayed by the fact that the rise of inequality since 1979 has not been reversed since 1997. In fact, figures from the Institute for Fiscal Studies show that Brown’s efforts have slowed significantly what would otherwise have been a big rise in inequality in the past seven years.

And Labour, particularly after last week’s reshuffle shenanigans, is not about to embrace a 50% top rate.

The Liberal Democrats have also been thinking about tax. In the collection of LibDem essays called The Orange Book, the party’s shadow chancellor, Vince Cable, rightly criticises the mind-boggling complexities Brown has introduced into the tax system.

He also proposes two rules — that public spending (and taxation) should never exceed 40% of gross domestic product, and that nobody should face a marginal tax rate of more than 50%. Take that second rule down by a few percentage points and there are the makings of a sensible policy here.

Cable is concerned that some low earners face punitively high tax rates when they come into the tax net and simultaneously lose entitlement to benefit.

He also hints at a softening of the traditional LibDem policy of introducing a top rate of 50% for those earning over £100,000, arguing that the same effect might be achieved by trimming some of the tax reliefs and allowances for the better-off.

Brown’s position, like that of George Bush senior a decade ago, is that “no new taxes” will be needed to meet his fiscal rules, notably the golden rule of only borrowing to invest over the course of the economic cycle, even after the next election. The jury is still out on that.

At the same time, however, the Treasury is projecting a significant rise in taxes as a proportion of gross domestic product (GDP).
Part of this is due to an expected recovery in corporation-tax receipts as company profits recover.

The biggest effect, however, comes from a rise in income-tax revenues from 10.9% to 11.6% of GDP over the next four years. Relative to what income-tax receipts would be if the proportion stayed unchanged, the chancellor will be clawing in an extra £10 billion annually in four years’ time.

This is achieved by fiscal drag, the oldest stealth tax in the book. Tax allowances and thresholds are typically uprated in line with inflation, while earnings rise more rapidly, usually by a couple of percentage points a year. That is the main reason why the number of higher-rate taxpayers has risen since 1997 from just over 2m to 3.43m. Each year about 150,000 new people discover the delights of higher-rate tax.

Fiscal drag also explains why the number of people paying no more than the 10% starting rate of tax — one of Brown’s flagship policies — has plunged from 7.7m to 3.4m.

The tax burden is rising, particularly on middle-income earners, as people are dragged into paying more tax. It is nowhere near 50% yet. But give it time.

PS: I have been under a lot of pressure to introduce into the column the phrase “economic girlie men”, popularised by Arnold Schwarzenegger. The idea that I would take my cue from a ridiculous, muscle-bound, actor-turned-politician is frankly preposterous. So here goes.

Encouraged by the chancellor, we have come to think of the countries of Europe, and particularly euroland, as economic girlie men. Weighed down with regulations, hampered by high unemployment and ageing populations, we strut, Schwarzenegger-like, and kick sand in their sclerotic faces.

Is that just a little unfair? A new report from the Washington-based International Finance Corporation, the World Bank’s private-sector finance arm, has some surprising findings about Europe. Its report, Doing Business in 2005, looks at barriers to enterprise around the world.

Of the 10 countries that have done most to make life better for business — particularly new businesses — in the past year, three are EU accession countries: Slovakia, Lithuania and Poland. More surprisingly, four are existing EU members: Belgium, Finland, Portugal and Spain.

Britain still scores well overall, coming seventh in an international league table for “ease of doing business” topped by New Zealand, America and Singapore. But other EU countries, particularly the smaller ones, are starting to close the gap.

Tie that to evidence that companies in Europe, notably Germany, are pushing through significant changes in working practices and hours under the threat of job competition from eastern Europe, and something is starting to stir.

The economic girlie men are getting one or two hairs on their chests.

From The Sunday Times, September 12 2004


An interesting column, and it is encouraging to see that someone else has spotted the rather major flaw in S&W's figures. Both the Conservatives and the Adam Smith Institute pounced on these figures with great fanfare - I've emailed them both to point out the error, but neither has responded or made a public correction, which says a lot about their own credibility.

Posted by: Jim at September 16, 2004 12:27 PM

Highly recommended site on this subject:

Despite high productivity Europe's economic performances are weak.
Europe's prosperity and employment stagnates. A wrong tax policy is the cause.

Plan for prosperity and total employment.

Consequences for employment and prosperity of two economic strategies

Tax policies for growth and job creation.

Economic analysis with comparison of Irish and Belgian policies.

Two scenarios in an era of graying population.

Posted by: Daniel Roberts at March 16, 2005 12:03 AM

THE IRISH FAIR TAX MODEL. How to boost the economy to 5% growth.

Irish wealth grew with over 167% between 1984 and 2002. Average European wealth grew at less than a quarter of that pace. Irish industrial jobs increased with 35% in this period, while in the rest of Europe industrial employment caved in. While the rest of the world was booming, the European economy gradually slided into stagnation or even recession.

Why is Ireland so different? Why could Ireland devellop into the second most prosperous country of Europe in barely a half generation of time? The Irish socio-economic model is a perfect synthesis of the social welfare state and Anglosaxisch liberalism. Its model differs from the rest of Europe by its "fair tax system": an optimal combination of MODERATE AND EFFICIENT GOVERNMENT SPENDING (35% of GDP) and A BALANCED REPARTITION of the TAX BURDEN between direct and consumption taxes.

The irish model provides the incentives for productive contribution, for dynamic entrepreneurship and a high participation rate. The Irish model is successful. Today Ireland meets the challenges of globalisation and the demographic time bomb. Ever more European countries adopt Irish policies, particularly in the East.

Also in England, France, Belgium, Holland and Germany could boost growth, job creation, and wealth by implementing the strategy of decreasing their demotivating taxation, and shifting the tax burden from income to consumption. Ireland showed that it can be done and that the strategy works. Where does one wait for?

More over the Irish success story, how and why can be found at following adresses:
(Dutch and Frensh versions now available at the same web site)

Posted by: workforall at October 5, 2005 06:14 PM