Britain needs more tax revenue – but who will pay?

David Kingman reflects on a recent BBC radio programme which investigated which taxes are likely to rise after the next general electionTaxation HM Revenue

Tax policy is about far more than just economics. The fact that no-one enjoys paying taxes means they have the power to influence – and, some would say, distort – how people behave. Governments have traditionally raised taxes on things which they wanted to discourage, such as smoking, and drinking alcohol, while offering tax breaks on things which are seen as being beneficial to society, such as saving money into a pension, lending tax policy a moral dimension.

Taxes almost never affect all people equally; in effect, taxing certain things more than others amounts to saying that certain people are expected to bear more of the burden for financing the work of the state. Taxes are also often structured to reflect some conception of justice, especially the notion that the wealthy should pay more than the disadvantaged within society.

The reason why these facts are important is that they demonstrate that our debates over tax are really debates about who should have to pay. In Britain, we already pay relatively high taxes by international standards: the government collects over a third (35%) of national output in tax revenue. Yet our national finances are such that further tax rises following the next general election appear to be an inevitability. So, who will have to pay?

Analysis – “They’re Coming for Your Money”

This question was at the heart of a recent episode of Analysis which aired on BBC Radio 4 on Monday 8 July, narrated by Paul Johnson, the director of the Institute for Fiscal Studies. This is now available online at the following web address:

http://www.bbc.co.uk/programmes/b036k73x

Paul Johnson was arguing that further tax rises during the next parliament are a virtual inevitability, barring a miraculous turnaround in the UK’s current economic predicament. Governments have historically put in place their biggest tax increases at the beginning of their time in office, and whoever wins the next general election in 2015 will be confronted by a structural deficit (the gap between revenue raised and government spending) of at least £20 billion per year. This gap is much too large to be closed entirely through cutting what the government spends, so achieving higher revenues will be an urgent priority for whoever is the next Chancellor.

The programme then takes listeners through a series of potential options for which taxes the government could potentially raise, laying out the possibilities and drawbacks that each one would offer.

It is made very clear to the listener that, however tax rises are implemented, it will ultimately be ordinary households who are worse-off. Campaigns for tax justice that focus solely on the most popular targets – the rich and major companies – both receive short shrift from the programme. It points out that the rich are already quite heavily taxed as it is (the richest 1% pay 22% of all Britain’s income tax), and in any case, it is simply a reality of the situation that wealthier people find it easier to shift their assets around so that they incur the lowest taxes possible. Major companies – despite the recent success of campaigns against corporate tax-dodging by firms such as Apple and Google – are still able to structure themselves in such a way that they can avoid onerous national tax regimes. It was emphasised that the economic evidence shows the cost of taxing companies is inevitably passed on to their shareholders, employees and customers, meaning it is ultimately ordinary people who pick up the tab anyway.

How can we raise taxes?

As a whole the programme was rather negative about the potential for large-scale reforms to the tax system which would reflect any coherent set of economic or political principles, as Paul Johnson reached the conclusion that the politicians are likely to use their most tried and tested methods deployed during previous waves of tax rises: avoiding the serious reforms which could create major political controversies, and instead focussing on small, subtle changes which could have a major impact over time, such as freezing tax thresholds and fiddling around at the margins with things like different rates of VAT.

This may seem like political cowardice, but the public is partly to blame. Given the rather hysterical reaction which greeted moves such as the “Granny Tax” (a reduction in the generosity of age-related income tax allowances), or the infamous “Pasty Tax” (an attempt to apply VAT on hot baked goods), we should not be surprised if politicians have been scared away from making the really difficult decisions.

The poor quality of our debate around tax is a shame, because there is much that could be improved about the UK tax system. One particularly interesting feature from IF’s point of view is the relatively favourable tax treatment given to older people. At present, pensioners pay no national insurance, have until recently benefited from a higher personal allowance, receive most pensioner benefits untaxed (such as the winter fuel allowance) and are some of the biggest beneficiaries of the fiscal privilege given to unearned income and asset wealth over earned income more generally.

Centre Forum, another think-tank, published a report last year called Tax Justice: Whatever Your Age, which argued that the imbalances between taxation affecting different age groups is one of the major distortions within the UK tax system.

They estimated that removing some of the most obvious tax breaks which are given to pensioners, such as not having to pay national insurance contributions and being able to take a tax free lump-sum from their pensions, could raise over £9 billion in the long term. Reforms to wealth taxes, especially making council tax more progressive or introducing a new property tax, would also make older property owners share more of the burden while discouraging the hoarding of properties which are larger than people need.

Strategies which looked at opening up new streams of revenue for the government, such as these, would be fairer to young people than simply piling more of the burden onto higher taxes on earnings, which has been a favourite tactic of politicians in the past.

Clearly we are all going to have to carry our share of the burden if Britain is to regain control of the deficit. Tax increases are not a panacea, but they will be a very important part of the solution, and it will only be fair if everyone has to do their bit – regardless of how old they are and how likely they are to vote.

Posted on: 17 July, 2013

13 thoughts on “Britain needs more tax revenue – but who will pay?

  1. Andrew

    If people who have paid for their homes and whose children have grown up choose to stay put near their friends and associations and to have space for friends, children and grandchildren to stay that is their right and should not be taxed.

    Nobody was forced to downsize to make it easier for me and my wife to buy our home, and nobody is going to force us to downsize. That is intergenerational justice.

  2. AW1983

    The trouble with the post war generation, when they talk about rights, is that they tend to only be concerned with their rights. They expect these rights to be honoured irrespective of the wider impact to society and they simply don’t give a damn about others. It might be more acceptable if this was derived from a firm belief in a socialist or conservative philosophy but as a cohort political preferences have become dealigned as they flip flop between ideologies in their own financial interests. For that same reason, Britain is going to become an increasingly high tax jurisdiction until they take us to the brink of bankruptcy and the IMF has to step in.

    The biggest problem is that the post war generation has no concept of what a good salary is. In the weird world of post war generation finance, it was perfectly possible for a couple earning £40k in today’s money between them to now find themselves owning a £400k house. The assumption is then made that this (or even two people each earning £20k) have a good income and it is not unreasonable to not only tax a lot of this at an effective rate of 32% (basic plus NI) but to also charge VAT of 20% of an awful lot of the other 68%. If a couple chooses to be a single earner family, they even have to pay an effective rate of 42% on a lot of their earnings over about £42k.

    The trouble is the post war generation didn’t actually have to pay £400k for that house. They might have paid half of that, maybe even less. On £40k today, home ownership in some parts of the country is a pipe dream. It’s certainly an outrageously low place to start taxing people at the higher rate. Once the tax, high rents, high food costs and transport are paid for, there really isn’t much left. Those who try less hard than I do to save simply build up unsustainable debt.

    The view that income is a prime target for redistribution is also a myth these days, at least against someone earning £40k. Income is the main route to aspiration and social mobility but those of us wanting to improve our lives see ourselves disadvantaged against various protected groups such as second home owners and those who inherit. I’m not looking to be put at an advantage, I would just like to see a more level playing field so I no longer have to feel like I am subsidising people who don’t need to be subsidised.

    The other pressing issue with taxing higher incomes rather than wealth is that it doesn’t give the post war generation much of an opportunity to pay off the debt they built up through a fairly transparent transfer from a government who couldn’t afford it to the private accounts of a generation who didn’t deserve it (unless you agree that their greater number of single income households compared to younger generations means they worked harder as they claim, or that the great council house rip off of the 1980s was done at cost). This undermines trust in the tax system by future generations who see the expense as merely subsidising the lifestyles of other people with no expectation of ever seeing the money again in public services. It’s not an unreasonable attitude to have considering we live in a world where it’s acceptable to stop free education at the same time as debating whether the government should pay for social care for someone living in a £1m house without expecting them to contribute, even after death.

  3. john

    Everything seems so simple in your baby boomer bubble.

    The reality is that upon retirement previous generations, accepted that they would have a much reduced income. They modified accordingly. This included downsizing their homes/cars/lifestyles etc. This seems quite logical & is. This system created a natural (and efficient) cycle of family sized homes passing to families.

    YOUR generation broke this cycle. You didn’t do this suddenly or covertly. You bragged in the 1990s that you would be the generation that would not adapt, you bragged that you would force younger generations to pay for this.

    This is your generations attitude to retirement & other generations. Rather than making adjustments to your lifestyles, you have forced governments to make younger generations for it.

  4. Andrew

    And I don’t recognise the braggart you describe in your stereotyping remarks when I look in the mirror. Many of previous generations grew old and died in the homes where they had passed their prime years and nobody told them they should not. Certainly not my generation in our youth.

  5. john

    ‘but as a cohort political preferences have become dealigned as they flip flop between ideologies in their own financial interest’

    AW1983.

    This is to key to intergenerational fraud. Mastered well by the baby boomer camelions.

    Social Care during the 80s/90s (then NI payers) – responsibility of the individual and individuals estate

    Social Care Now (no longer NI payers) – responsibilty of the state, wack up the NI contributions

  6. Andrew

    So changing your mind on political or economic issues is fraud?

    “A twenty-year-old who is not a Socialist has no heart. A sixty-year-old who is has no brains”.

    Where is your evidence of my generation changing their mind on the NI question?

    Where is the proof that you won’t change yours?

    And I’d still like to know whether you say I should be forced to downsize or taxed for it if I don’t.

  7. john

    Yes Andrew it is fraud.

    You genuinely seemed startled and surpised at this intergenerational fraud malarky. What are we all going on about?

    I can see why you don’t want the boat rocking. You may be one of thousands upon thousands of your generation who –

    -enjoyed the first 22 years of their lives in (cost free) education

    -spent 30 odd years in the public sector, building up unaffordableand undeserved pension promises for meagre contributions.

    – were quite happy to provide your pensioner generation with a little as possible

    -took early retirement in their 50s facing a probable 35 year retirement

    – during this 35 year period expect younger generations to pay for you to stay in the big house, big car and to take 6 foreign holidays etc etc

    Please just do a little reaserch and look outside your bubble.

  8. Kelly

    Yes, I am happy to say you should downsize or pay. So should I. Increasingly in my neighbourhood the biggest houses are occupied by retired couples or singletons. Many of these have second homes, so don’t even occupy their ‘main’ homes full time. Society as a whole is being penalised for this by having to squeeze into the remaining more cramped property.

    The most efficient property tax is called the Council Tax. But nobody seems to be brave enough to add in a couple of extra bands for million pound properties.

  9. Andrew

    John: I am 61 and still working.

    I opposed the abolition of the grant and would like to see it reinstated.

    Fraud requires an intent to steal, to deceive, and only individuals, not groups, can commit it. I have no such intention therefore I am not a fraud.

    Kelly: If my wife and I downsized from my two-bedroom home (or am I allowed two bedrooms, is that all right, Sir?), we could never have an overnight guest again, please Sir (or Madam, yours is a unisex name) is that fair? If you want to downsize, go ahead, just don’t tell me to.

  10. Andrew

    And while I am here:

    If the pension was unaffordable it should not have been sold to me. But it was. Like any contract it must be honoured. Like money in NSI.

    The contributions were never meagre and have recently been viciously increased.

    “Undeserved” is mere spite: the politics of envy.

    We were generous to the previous generation. It was they who first got (by law in 1971: research it) the full indexation which they had not paid for – and my generation which met the bill. And I have never grudged them getting at my expense what I have paid for for myself.

    And finally: it’s part of the bargain between homebuyers and society that so long as they are able to manage in their homes, they can stay there. In return they don’t look to the community to house them. That applied to the previous generation and it applies to mine.

    If you want to change the rules, tell future homebuyers that when their children and grandchildren get greedy for space they may be forced to sell; but don’t tell me. You don’t move the goalposts after the game has started – least of all at one end only and because you think you are losing.

  11. Kelly

    Andrew: If you have a two-bedroomed home worth £200,000 (say) then you wouldn’t be the target of any new property/wealth tax or charges and no need to downsize. The idea behind these taxes is that they be linked to property that is well above the national average. If it turns out that your two-bedroom home is worth £500,000 then I would argue that it merits a higher Council Tax charge then it currently incurs. If you can’t afford such a Council tax then perhaps you’d have to downsize – but frankly, if somebody in an expensive home can’t find another two…or three…or more bedroom house for less than £500,000 then they live in a different world from me.

    Kelly (Ms, since you ask…)

  12. john

    Andrew-
    So in 1980 you were 28 when the state pension index was broken to help enable low taxation for the working age population. Let’s assume you started full time employment at 23 years of age.

    This means that you paid for this link for the first 5 years of your employment. Probably the 5 years where you earned the least. For the next 33+ years, you didn’t.

    5 years before you draw this pension, your generation awards its self a ‘triple lock guarantee’ which you will expect younger generations to fund for the duration of your c30 years of retirement.

    Are you starting to, at least, get a feel for intergenerational fraud?

    Generous to the previous generation?

    In 1980 a 25 year old (1940) WW2 soldier started to draw his state pension. Your generation effectively said to him, if the UK economy prospers, we won’t allow you to share this.
    Was he not deserving of a ‘triple lock pension guarantee’? What makes your generation so special?

    With regard to public sector pensions – you won’t find a credible economist/analyst who would argue that your public sector pension is not GROSSLY out of propotion compared to your career contributions. But I’m not sure your concerned about credibility.

    Andrew I’m not sure economics is your strong point, but you do understand that the reinstatement of the grant and the abolition of tuition fees would cost money, that would have to be found. Every time, it’s even suggested that your generation may be asked to share a little of th pain of recession, you kick & scream like babies. Generation Entitled, Generation Gimme, Generation Grab, Generation Greed.

    And finally your claim of ignorance or non intent. Your ultimate insult to your own intelligence. If you don’t know the answers to these 2 questions, then you can have your claim of ignorance?

    1, Did breaking the state pension index in 1980, relative to earning, increase or decrease the state pension?

    2, Will and has you triple lock , relative to earning, increased or decreased the state pension?

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