January 2018 newsletter – To Tax or not to Tax? or The Truth about Taxation

When UK public services are under severe strain and even the UK’s Health Secretary admits that the NHS is in serious trouble, Robert Neild argues that we shoul bite the bullet and pay more tax.

In Britain public services are falling apart. Our health and social care services are deteriorating; crime rates are soaring, and so are violence and suicide in prisons; the quality of our schools is uneven and unfair; state pensions are miserly; poverty and homelessness are increasing; the civil service is understaffed; our roads are congested and potholed; support for research and the economy is being squeezed. On all sides we are confronted by social injustice and economic neglect.

Across the Channel we typically find roads and railways in fine condition, good health and other social services, and good public pensions. The welfare of the people and the infrastructure are cared for.

The policy of trying to balance the budget in a recession is partly to blame, but the prime culprit is tax policy. On the Continent governments have devoted an increasing proportion of their national income to the provision of public services and infrastructure as their economy has grown, and they have raised taxation to finance it. In Britain public expenditure and taxation have been squeezed since the 1970s. Consequently Britain, which was a relatively high tax country after the war, is now a low tax country and is suffering for it.

The best measure of what has happened is tax revenue as a percentage of GDP, or the ‘tax take’. The latest figures, (Eurostats for 2015) show that the average figure for the EU is 40 percent. In Belgium, France and Denmark the figure is 47 percent. In Austria, Germany, Italy and Sweden it is between 40 and 45 per cent. For the UK the figure is only 35 percent; for the US it is less than 30 percent.

If present policies are not reversed, the deterioration in public services, already severe, will continue as the delayed effects of the cuts already made come through. At the moment, over-stretched and underpaid workers in the public sector are trying to maintain the standards of the service they provide. But there comes a point where the demands on reduced staff become unbearable, their morale is damaged and acceptable standards of service can no longer be maintained. That breaking point has clearly been reached in the prison service. Similarly we face deterioration in our roads, public buildings and other capital assets on which maintenance expenditure and investment have been cut.

Politicians and the electorate have been driven along the path to low tax and impoverished public services by propaganda against tax and public services which in Britain, as in the US, has accompanied a surge in selfishness and inequality. Fallacious economic arguments about incentives and 'trickle down effects' have been used to claim that tax cuts for the rich would improve the economic performance of the nation and hence the wellbeing of the masses. If those propositions were right, Britain would now be forging ahead of its higher-tax Continental neighbours in economic performance and well-being, not lagging behind. 

British attitudes to tax have changed remarkably since 1945. Then the people, having accepted high taxation to pay for the war, continued to accept it as it went to pay for the reform of society along the lines that were agreed by the Conservative and Labour party during the war and that were applied by them both, with little variation, until the Thatcher revolution. Taxpayers recognised, perhaps reluctantly, that they were making a necessary contribution to public services of which they and the whole community were beneficiaries. In so far as there was tax evasion and avoidance, it was furtive, not voiced or flouted.

Now taxation is attacked as if it were robbery; the tax code is riddled with concessions made by Chancellors to buy support from particular interests, tax morality is deplorable. A terrible example has been set by the City which has both enjoyed rich tax concessions and been revealed, by leakage, to be probably the leading international centre for tax avoidance and evasion, with the dirty work conducted offshore, mostly in British possessions.

The attack on taxation was put into action by Mrs Thatcher who, with her faith in extreme laissez-faire, came to power at a time when, absurdly, the top rate of income tax was 83 per cent on earned income and 98 per cent on unearned income. Mr Blair and other opposition leaders did not have the courage to reject the policy, refute its economics and commit themselves to restore taxation to an adequate level. They bowed to the anti-tax lobby. They abandoned principle for power.

Now at last the tide shows signs of turning. People are feeling and seeing how badly cuts in public expenditure are damaging our public services and causing poverty and injustice, how inequality has increased, how immoraally the rich avoid and evade tax and how badly the economy and real wages have performed: there is a backlash against the consequences of inadequate taxation. Mr MacDonnell, the shadow Chancellor of the Exchequer has responded by promising increases in public expenditure on health, education and local government to be financed by tax increases concentrated on tax avoiders and the rich.

That is a respectable response. But the British people need to be given a much grander strategic vision of the alternatives before them. They need to be told how great would be the effect of raising our tax take to the level of our Continental neighbours. It needs to be explained that since public expenditure is about one third of GDP, an increase in taxation of one percent of GDP makes possible approximately a three percentage increase in public expenditure: there is a multiplier of approximately three between the two figures. For example:

a. A 5 per cent increase in the British tax take from 35 to 40 percent of GDP, to make it equal to the German figure and to the EU average, would pay for an increase in public spending of no less than 14 percent

b. A 10 per cent increase to 45 percent of GDP (still short of Belgium, France and Sweden’s figure of 47 percent) would pay for a 28 per cent increase in public spending.

This multiplier has been working in the opposite direction: a reduction in the tax take by one percent of GDP has required a cut in public expenditure by 3 per cent: which helps to explain why the pursuit of low taxation has been so painful. The benefits of turning it round are obvious.

The moral choice whether Britain should follow the Continental model and raise tax for the sake of social justice and economic performance, or should continue to attack tax and suffer the social injustices and politico-economic failures of the United States is far more important to our own economic prospects, and to the conditions of life of our children and grandchildren, than Brexit or public ownership.

I am convinced we should follow the Continental model. I would gladly pay 5 or 10 percent more of my income in taxation for that purpose. And at last I see grounds for optimism. The electorate is reacting to the damage that years of public expenditure cuts have done to their lives and prospects, and the social media may be a means of outflanking the traditional media in a political debate about taxation. There may be scope for a leader of moral conviction, whether from the present political parties, or a newcomer, free from party baggage like Monsieur Macron, to gain power by campaigning forthrightly for higher and fairer tax for the sake of social justice and economic revival.

Robert Neild
University of Cambridge

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