Wednesday, 21 March 2012

Signalling problems

Given that the budget was always likely to be fiscally neutral, i.e. making no large scale changes to existing revenue or expenditure plans, and given that we're approaching the half-way mark of this parliament, its significance was always going to be largely political. In other words, what signals would the government send about its longer-term aspirations by rearranging the deckchairs.

The budget is pro-big business, rather than pro-business. Corporation tax is being cut further (down from 28% to 22% over the life of the coalition), but not the small profits rate. Small businesses gain simplified paperwork and promises of credit easing, rather than the more concrete help with business rates or fuel duty that they asked for. The clampdown on corporate tax avoidance will probably be no different to previous attempts at this, i.e. ineffective, indeed it looks like the pass has already been sold in respect of offshore taxes. The signal is that Britain is "open for business" for global corporates, though more specifically corporates that treat London as a tax haven gateway.

The cut in the top rate of tax from 50% to 45% will be offset by the increase in stamp duty (plus various cunning ruses that will hit pensioners), however stamp duty receipts on properties over £2m will be heavily dependent on the health of the top-end market in London. Given the extent to which the richer parts of the capital are divorced from the health of the national economy, that may prove to be reasonable, but it sends a clear signal about expectations in terms of regional rebalancing (and implicitly industrial rebalancing) - i.e. it isn't going to happen any time soon. This is consistent with the plans for regional public sector pay levels.

The increase in the personal income tax allowance has been hailed as a Lib Dem victory, a "Robin Hood" tax cut, but without much taking from the rich. Nick Clegg says: "We are very proud that we are taking over 2 million people out of paying income tax altogether". The essentially regressive nature of this change has been identified by the IFS, looking at the target of a £10,000 personal allowance and how it impacts on families.

It's the better off that gain most, mainly because personal allowances are doubled in dual-income families. Poorer families either don't earn enough to get the full cash gain or they have their gains clawed back by proportionate reductions in benefits. Pensioners get no benefit at all. So, not much giving to the poor.

Increasing personal allowances has long been attractive across the political spectrum because it "lifts millions out of tax altogether", as if they were pulled to safety from the Grimpen Mire. In fact, those earning below the allowance level still pay VAT and other taxes, which can mean they still pay a higher effective rate than a millionaire.

However, there is another reason why we should be cautious about tax-free allowances and the signals they send. There is a fundamental link between taxation and representation in a democracy, given that elected governments determine the tax rules and what the revenue will be spent on. The implicit contract assumes responsibility and consequentiality for all voters. This gives rise to the idea that the vote should be limited to income taxpayers, as these citizens have "skin in the game".

While the "no representation without taxation" meme is still restricted to the Tory right (and currently provocation rather than serious policy), it will spread the more we shrink the tax-paying segment of the population. This is because it is not a response to a problem of consequentiality (unless you think the poor voted Tory at the last election in the hope of increased benefits), but because it is an ideological prejudice: the poor are irresponsible and cannot be trusted with the public purse. The more taxpayers see themselves as an "embattled majority", the more resentment they will feel towards "tax free riders".

For this reason, I would be quite happy to see the personal tax-free allowance abolished. In its place we could have a much more progressively graded tax regime, perhaps 5% up to £10k, then 10%, 20% etc. The extra 5% cost to the poor could be offset (and more) by a reduction in VAT. This approach would ensure that everyone had some skin in the (income tax) game, and might even encourage more people to vote. A signal in support of democratic legitimacy and engagement.

No comments:

Post a Comment