Reducing public spending is not the only way of balancing the budget, but taxation seems to be taboo for politicians
‘I like paying taxes,” the US supreme court Justice Oliver Wendell Holmes once remarked, “with them I buy civilisation.” As hundreds of thousands of self-assessment taxpayers frantically file their returns to Her Majesty’s Revenue and Customs, ahead of 31 January’s looming deadline, the late judge’s words are worth bearing in mind.
We need to talk about tax. I won’t pretend I like paying taxes. I don’t. But I agree with the argument that it is taxation that helps civilise our society. Tax revenues fund high-quality public services, the welfare state, our national defence and much-needed infrastructure projects. Progressive taxation of income keeps inequality in check, by redistributing from the rich to the rest.
But taxation also goes to the heart of the current debate over the deficit. In his new and aptly titled Compass pamphlet, White Flag Labour, economist Howard Reed points out that “there are two ways to close a fiscal deficit when the economy is operating at full potential – one is to cut spending, the other is to raise taxes” yet deficit hawks assume that “cutting spending is always and everywhere the preferred route to fiscal balance, rather than raising more revenue via the tax system”.
Fiscal policy has been reduced to a sterile debate over public spending in recent years. Our political elites act almost as if taxation doesn’t exist. Defending Labour’s recent tilt towards cuts, Ed Miliband proclaimed in a speech on 10 January that “the next prime minister will still have a deficit to reduce, and will not have money to spend”. Really? Why can’t said deficit be reduced through additional tax revenues?
The phrase “deficit reduction” has become a convenient euphemism for cutting public expenditure. It shouldn’t surprise us. The biggest myth in British politics is that government borrowing spiralled out of control because of overspending; our record budget deficit, say the Tories and their Lib Dem mini-mes, is the inevitable consequence of Labour profligacy.
It cannot be said often enough: the deficit was caused not by rises in public spending but by a collapse in tax revenues. For example, by 2009-10, the Treasury had received around £112bn less in tax revenues than it had expected to. As Channel 4’s FactCheck website decisively concluded earlier this month, “the drop in tax receipts triggered by the economic crisis is what’s behind the bulk of the £149bn deficit”.
Tax is the fiscal elephant in the room. Senior politicians of all stripes daren’t refer to the T-word in public – those who do, such as Nick Clegg, call for income tax cuts, not rises (which, incidentally, would also benefit the rich). Meanwhile, apologists for austerity loudly claim that cutting spending is the best way to reduce the deficit; that taxes are too high already; and that tax increases would be unpopular with voters.
All three of these claims are demonstrably false. First, as the TUC’s Duncan Weldon has pointed out, the UK’s Office for Budget Responsibility, the non-partisan US Congressional Budget Office and the International Monetary Fund all estimate that “cuts in government spending have a higher [fiscal] multiplier than increases in taxation”. Thus, cutting spending has a much bigger, more negative impact on GDP growth than raising taxes. Is it any wonder, then, that previous chancellors who tried to cut the deficit, including Tories such as Norman Lamont and Kenneth Clarke, relied on a 50:50 ratio between spending cuts and tax rises, rather than the growth-choking 77:23 ratio adopted by George Osborne?
Second, the fact is that, compared with our continental cousins, Britain is a relatively low-taxed nation. Take total tax revenue as a percentage of GDP: OECD figures for 2010 confirm that the UK (at 35%) remained below Germany (36.3%), France (42.9%) and Italy (43%) – and at almost the exact same level as in 1990, when Margaret Thatcher left office.
The comparison with Thatcher is instructive. Conservative commentators decry Labour’s 50% tax rate as “the politics of envy reborn” (Matthew D’Ancona) and “not far … from Stalin’s assault on the kulaks” (Boris Johnson), while conveniently forgetting that their heroine only cut the top rate of tax, from 60% to 40%, in 1988; for nine of her 11 years in Downing Street, Thatcher presided over a higher top rate of tax than the one introduced by Gordon Brown in 2009.
Third, poll after poll shows overwhelming public support for a tax on bankers’ bonuses; a mansion tax on multimillion-pound properties; a windfall levy on the oil and utility companies; a Robin Hood tax on financial transactions; and a one-off wealth tax of 20% on the richest 10% of households (which would raise a whopping £800bn and, according to YouGov, is backed by three out of four voters).
Increasing taxes on the rich to help reduce the deficit isn’t “class warfare”, as President Obama belatedly argued in his state of the union address last week: it is “common sense”. If our leaders want us to believe that they are serious about the deficit, then they have to lift their self-imposed taboo on discussing tax.
The time has come to say the politically unsayable: it is wrong to pretend that cutting spending is the only, best or main method of eliminating the deficit. It isn’t. In the long run, once the economy is off its knees and growing again, we need to make much greater use of taxation to balance the budget. Perhaps we can update Justice Holmes’s mantra for our age of austerity: I like paying taxes, with them I pay down the deficit.
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