Higher taxes and the miraculous £6bn more

Several parties are out to show they can deliver more money to public services without hurting most voters. The Lib Dems say they will increase Income Tax by 1p to deliver £6bn more for the NHS and social care. Labour argue for a big hike in the Corporation Tax rate to pay for a wide range of extra public spending and various expensive renationalisations. These views are based on two common fallacies in UK debate.

The first fallacy is an extra few billion will make all the difference. The truth is all parties in government do increase the spending on the NHS, social care and other priorities every year, and all wish to see these services properly funded. Since the Conservative led coalition entered government, total public spending has risen by 20% from £669 bn to £802 bn. Health spending has gone up more, by 23%, from £96bn to £117bn. The Conservative government has promised another £8bn to the NHS and £2bn more to social care, and will doubtless review the figures regularly to see if they are enough or need increasing if re elected to government. Just adding £6bn as a one off will not suddenly transform the NHS, I doubt there is a thought through budget of how to spend that money and what improvements it would buy. The extra pound has no magical powers not shared with the pounds already being spent.

The second fallacy is the idea of painless tax rises. 1p on Income tax rates sounds modest. That is a 5% increase in the standard rate, a 2.5% increase in the 40% rate and a 2.2% increase in the 45% rate. It means hundreds of pounds extra for most earners. That is money which families cannot then spend on their priorities.

The proposal for a big rise in Corporation Tax might well backfire. Having a low rate by international standards is one of the ways the UK attracts substantial inward investment, building a strong presence by many dynamic international companies here. Over the period when the reductions in rate have been put in, our revenue from Corporation Tax has gone up. Why wouldn’t we lose some revenue if we push the tax rate up, especially at a time when the USA is planning a major move the other way. I have no wish to be a soft touch for big business, but it does seem we are finding the right levels of Corporation Tax to get them to pay more.

In 2009-10 the Corporation Tax rate was 28% and the tax take was £36bn. £6.4 bn of that came from North Sea oil. This year the rate is 19% and the estimate is for £46bn of tax revenue with no revenue from North Sea oil. The take has gone up in recent years despite a major reduction in North Sea volumes of output. So by cutting the rate from 28% to 19% we have gained 28% more revenue, or an impressive 55% if you adjust for the ending of North Sea taxable output.

Published and promoted by Fraser Mc Farland on behalf of John Redwood, both at 30 Rose Street Wokingham RG40 1XU

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34 Comments

  1. Dame Rita Webb
    Posted May 12, 2017 at 5:31 am | Permalink

    “Several parties are out to show they can deliver more money to public services without hurting most voters.”

    Well that will make a change from your lot, who since 2010 have doubled the national debt and continue to deficit spend despite promising to stop so in 2015. In the meantime we have 20,000 fewer coppers, good primary schools that have catchment areas that run into the hundreds of metres and what was that thing in the papers the other day about A&E departments in hospitals?

    Perhaps Mrs May should adopt Groucho Marx’s saying about “who are you going to believe me or your own eyes” as her election slogan?

    • John Finn
      Posted May 12, 2017 at 11:03 am | Permalink

      Well that will make a change from your lot, who since 2010 have doubled the national debt and continue to deficit spend ….

      I think it would help if you understood deficit and how it relates to debt. A deficit is just some amount you overspend one year which can dropped the next – like a new washing machine. It includes all the revenue required to run our public services including all the salaries of teachers, nurses, police etc. You can’t simply eliminate that spending in a couple of years, so we were bound to have some sizeable deficits for several years to come – whichever government had come to power in 2010. While you have deficits – debt will grow.

      As JR points out total public spending has risen from £669 bn to £802 bn since 2010 but in order to keep it from being even higher (with higher deficits AND debt), some “cuts” were necessary.

      • John Finn
        Posted May 12, 2017 at 11:11 am | Permalink

        Aaargh! should be “A deficit is NOT just some amount you overspend …. ”

        Grammar’s not great either but we’ll let that pass.

        • Dame Rita Webb
          Posted May 12, 2017 at 5:19 pm | Permalink

          eh and how long are you going to be able to keep this up then?
          http://www.tradingeconomics.com/united-kingdom/government-debt-to-gdp

          • Edward2
            Posted May 13, 2017 at 9:14 am | Permalink

            Are you in favour of deeper cuts and austerity or less?

          • Hope
            Posted May 13, 2017 at 4:54 pm | Permalink

            JR, you highlighted in 2010 that there were no real cuts and public spendings nag was increasing in real terms. You made the point that there was the complete opposite to Osborne’s false claims of 80/20 spending cuts to tax rises, in fact you made the point it was closer to 100 tax rises. There was a hairs width between what Darlings no planned and Osborne.

            Seven years on Osborne failed every prediction or target as did Carney. Over 300 tax rises, overseas aid increasing by breath taking amounts while the govt cannot afford adult social care and demand we pay twice through community charge and then enforce us to sale our homes! The £1.7 billion demand by the EU would pay for 60000 extra nurses including their pensions. Cameron paid £2.9 billion! How many nurses would this provide?

            Come on JR, be honest with us for your govt’s tax and waste record as you cited back in 2010.

  2. Roy Grainger
    Posted May 12, 2017 at 5:56 am | Permalink

    During the Brexit campaign teams of economists were writing to the newspapers saying what a catastrophe it would be in terms of GDP reduction and unemployment. How come those same economists aren’t now writing to the papers warning us about voting Labour on the same basis ?

  3. Mark B
    Posted May 12, 2017 at 6:17 am | Permalink

    Good morning

    And the Conservative party are of course no strangers to tax and NIC rises are they ?

    We need to start to look at solving the problems and not just endlessly throw more money at it in the hope that this will help. It has never worked in the past and not work now. All it shows it that those seeking election are not fit for office.

  4. eeyore
    Posted May 12, 2017 at 6:54 am | Permalink

    This is a little hobby-horse of JR’s, that small sums make little difference to government. I’m glad that he agrees they make a big difference to those who pay them. Those in power should never forget that every £12 they spend has cost some honest worker an hour of his life. Every £1m uses up a whole working lifetime.

    What is it about politicians and money? We hear much from parties on the Left about how they plan to spend. Their relish for it is almost touching. But money’s easy to spend and hard to make. They should be pressed on their plans for making money for Britain. I suspect that, if they were, the silence would be profound, but not pregnant.

    Reply Small sums can make a difference if spent well. I am suspicious of round numbers of extra money if not backed up by detailed statements of how it would be spent, and why that spending cannot be achieved within existing budgets.

    • eeyore
      Posted May 12, 2017 at 4:36 pm | Permalink

      Thank you. After posting I regretted that my phrasing was less than felicitous. I am grateful for your correction.

  5. Richard1
    Posted May 12, 2017 at 7:00 am | Permalink

    It is clear that both Labour and LibDem are economically illiterate, we have many examples over the years of the negative effect on receipts of increasing taxes. We wait with trepidation for the Conservative manifesto though. There are no signs yet that Mrs May sees the need for a relentless focus post Brexit on competitiveness and encouraging entrepreneurship and investment. Nonsense like the energy price cap and workers on boards is the wrong way to go. If Brexit means Brexit we can’t afford fatuous gesture policies like that.

  6. BCL
    Posted May 12, 2017 at 7:05 am | Permalink

    In my view, the higher earners are, to a considerable degree, taxed as we are all policed, by consent. Those whom Jeremy Corbyn seeks to tax at higher rates are generally able to manipulate their incomes and even their residence. If they feel (and I think it is “feel” rather than “reason”) that they are over-taxed, they simply earn less, move abroad or take other steps. I have always held the view that once the rate gets over 50%, so that the taxpayer knows the government gets more than he does from the effort, the incentive to bother evaporates. The incentive to reorganise or to cheat also increases. Perhaps this is why higher taxes lead to lower tax yields. None of this applies to 1p on the basic rate of course, because almost everyone pays that. However that is disproportionately borne by the lower earner who is also generally unable to reorganise his affairs to avoid it.

  7. Glenn Vaughan
    Posted May 12, 2017 at 7:11 am | Permalink

    “If you drive a car, I’ll tax the street
    If you try to sit, I’ll tax your seat.
    If you get too cold, I’ll tax the heat
    If you take a walk, I’ll tax your feet.”

    • Know-dice
      Posted May 12, 2017 at 10:37 am | Permalink

      Many thanks – George Harrison

      Copyright Northern Songs?

      • hefner
        Posted May 12, 2017 at 12:09 pm | Permalink

        In the days when the highest rate was 95%.

        • Hope
          Posted May 13, 2017 at 4:57 pm | Permalink

          Hef, but there were not the vast amount of stealth taxes then. So if the stealth taxes on everything was taken away and added to income tax how much would the top earners and the rest of be paying? I think it is a more honest way to show each of us personally how much tax we pay.

          I would support no stealth taxes and all taxation on income tax. We could then see who would vote for for which party.

  8. alan jutson
    Posted May 12, 2017 at 7:25 am | Permalink

    As usual Politicians who want to play with the system of taxes, benefits and spending take no account of human nature, who’s action in response is usually very different to what they have assumed will happen.

    Penalise people too much with too higher taxes and they either, find a legal way around it, work less hard because there is no point in working extra for less reward, leave and go elsewhere, or stop working altogether and retire, only to spend most of their money abroad (not in the UK) where they enjoy better weather.

    Make benefits too high and easy to get, which in some cases perhaps discourages work, because some people are incapable of actually earning, what they are getting paid in benefits.

    In work benefits simply subsidise the companies which pay low wages, and the minimum wage becomes the standard rate if it is too high.

    Attack the self employed, and people see no point in taking the risk of a non guaranteed income.

    The economy and how it works is a very fine balance about very many things.

  9. Bert Young
    Posted May 12, 2017 at 7:52 am | Permalink

    Labour and the LibDems simply want to tax the , so-called , wealthy as a sign of fairness in society ; they completely disregard the fact that a buoyant economy is related to growth and the role of entrepreneurs . If we are able to attract business in a competitive world , it is all down to an attractive tax regime and the availability of skills .

    The figures John publishes today adequately illustrate how tax revenue increases in a lower tax enviroment . Society is required to take care of the weak and the resources to pay for this have to be there ; it’s plain to me which system I would support .

  10. Antisthenes
    Posted May 12, 2017 at 8:41 am | Permalink

    Politicians bribe for votes with voters money, with fantastical promises that are not fulfilled but instead impoverish and create an environment where corruption, abuse and misuse can flourish. Not all but the many especially those who are of the left wing political persuasion. All of which comes at a price that politicians expect not to pay but will be by future generations of voters long after the politicians have profited and retired into comfortable retirement and beyond.

    Voters allow this state of affairs because many are as venal as those politicians and want those bribes and wish to believe those promises of something for nothing and the like. They to do not care that it has a high cost that someone will eventually have to pay as they anticipate it will not be them.

    The left purport that they are striving to make a better world in which we all behave better toward one another and fairly share our labour and consumption. The realities is they are not doing that they are encouraging envy, division and selfishness and many other vices. True they all already exist in our non collectivist society but at least by use of the market they are put to good use in creating plenty and not creating scarcity as the left would have us do.

  11. Owen Francis
    Posted May 12, 2017 at 8:56 am | Permalink

    How does the 1p on income tax translate to the % values on the different rates that John is giving.

    • hefner
      Posted May 12, 2017 at 12:14 pm | Permalink

      1% added to 20% is 5%, 2.5% to 40%, 2.22% to 45%.

      • Owen Francis
        Posted May 12, 2017 at 2:51 pm | Permalink

        OK I understand it is the increase on the current rates … thank-you

  12. acorn
    Posted May 12, 2017 at 9:04 am | Permalink

    The story behind Corporation Tax (CT) yield, isn’t as simple as the headline rate and an implied connection to the mythical Laffer curve. Have a read of http://budgetresponsibility.org.uk/forecasts-in-depth/tax-by-tax-spend-by-spend/onshore-corporation-tax/ Corporation tax is forecast to decline as a percentage of GDP.

    Corporation Tax is the easiest tax to avoid; Treasury CT policy changes, are the equivalent of herding Cats.

    • a-tracy
      Posted May 12, 2017 at 10:11 am | Permalink

      Acorn can you give us some tips on easy ways to avoid Corporation Tax please.

      • hefner
        Posted May 12, 2017 at 12:18 pm | Permalink

        You must have filled a Corporation Tax return, and see you have to declare your gains and losses. Are you sure you have properly added up all your losses?

      • acorn
        Posted May 12, 2017 at 4:22 pm | Permalink

        This site is not authorised to give financial advice. But, as a lay person I would say, pay yourself a small salary and take profits as dividends. Maximise company pension contributions. Opt for contracts where you can operate outside of IR35. Structure the tax on your personal remuneration efficiently, keep as much profit as possible within your business. Review which VAT system you are using, flat rate or cash.

    • Richard1
      Posted May 12, 2017 at 11:46 am | Permalink

      It should not be the objective to get all taxes to increase as a %age of GDP! What we want is to create incentives to maximise growth (GDP) in the expectation that the actual money raised will rise, which they will if set competitively due to the Laffer curve effect, demonstrated on so many occasions both positively and negatively.

      • acorn
        Posted May 12, 2017 at 5:06 pm | Permalink

        There is no sovereign “currency issuing” nation that uses the Laffer curve to set taxation levels. Taxation does not fund government spending. The government always spends BEFORE it taxes. Every Pound the government spends, every single day, is brand new and fresh from a keyboard at the Treasury. It is just a “Unit of Account”. It is the scores on a scoreboard at a cricket match or a tennis match.

        Taxation should be used to slowdown some element of a socio-economic system that is not wanted. If you want people to stop smoking tobacco, you tax it heavily as a substitute for banning it with legislation, that probably will not work.

        If you don’t want the 1% elite to get even richer you tax heavily their incomes. Taxing their wealth is difficult, even if you can find where it is hidden.

        Remember in WW2 the government was “deficit spending” like crazy for the war effort; debt to GDP hit 250%. It had to tax incomes at high nineties percent to prevent hyper inflation. Even then, it had to introduce rationing to keep hyperinflation under control, in an economy that had lost a large part of its capacity to supply goods and services.

  13. Dennis Zoff
    Posted May 12, 2017 at 9:25 am | Permalink

    John, you are correct.

    However, most people are totally unaware large Corporations have smart people working in finance departments that focus keenly on “tax liability avoidance” internationally. Any hike in Corporation tax will almost certainly result in smaller than expected tax returns as you clearly point out. But it is always a nice vote gaining political rhetoric, though without any meaningful teeth. In reality, it is a political anathema to push Corporate businesses too far, as we very well know!

    I never quite understand how HMRC internals work. However, they are driven by blind sided Politicians, who have limited real life business experience, hence their idiotic decisions!

    • Anonymous
      Posted May 12, 2017 at 12:37 pm | Permalink

      Pay the smart people more than the Corporations do.

  14. Prigger
    Posted May 12, 2017 at 9:51 am | Permalink

    LibDems always design cosy prods ostensibly to the comfortably off. “Penny for the guy Mister?!” I confess to chanting in the company of other kids door to door with something like a scarecrow..old trousers, shirt and for its head —brown paper shopping bag, the ones with string handles, stuffed with old newspapers and eyes nose and mouth crayoned on ( probably Daily Mirror for we were poor but also self-importantly blank ).

    “Penny for the Guy, penny for the guy!
    Please put a penny in the old man’s hat!
    If you haven’t got a penny a ha’penny will do!
    If you haven’t got a ha’penny then God …bless… you!”

    We extracted as inevitably also happens with the Lib Dems, far more than a penny and much more from the very poorest of homes as opposed to the marginally richer who had proper baths with hot running water and an inside toilet.
    LibDems should be told “Heard it” but firmly :where to put their penny.

  15. a-tracy
    Posted May 12, 2017 at 10:08 am | Permalink

    “The Lib Dems say they will increase Income Tax by 1p”, Kezia Dugdale has also said Scotland should raise income tax for everyone earning more than £21,500 pa in Scotland. My question is does this include an extra 5% increased tax on graduates (all those born 1990 to 2000) who are paying graduate taxes (in the form of student loans for tuition and living costs) of 9%, giving them an effective tax rate over £21,500pa of 42% until the next band in Scotland which will be at £43,000 when their tax rate will go up a further 20% and their employee’s ni has been fiscally dragged forward with 12% on an extra £2,000, giving an effective tax rate of 51%.

    So you ambitious grads it’s not the higher earners that will be paying through the nose for all of Jeremy’s and the progressive alliances give-aways it will be you guys. Oh and my guess is if they end tuition fees your generation will still be paying a lifetimes grad tax while future students don’t. What sounds fair when you’re studying and living on toast won’t seem so fair when you get that decent job you’re studying for, it’s always the middle that pays and the middle has been as good as confirmed as those earning between £21,500 and 80,000 pa.

    • a-tracy
      Posted May 12, 2017 at 10:10 am | Permalink

      I forgot to add that those very ambitious or most bright graduates or those that required a masters degree to really get up the social mobility ladder from the working class ranks, well you guys will have an additional 6% tax to pay to pay off your master’s loan. So you get a tax rate of 48% from £21,500 pa.

  16. a-tracy
    Posted May 13, 2017 at 9:20 am | Permalink

    John, your party needs to explain Labours’ tax plans for these students before they blindly walk into eye watering taxes on quite low incomes. Quite a few of them get two voting cards too and with postal votes who would stop them voting twice? How do people with two homes get stopped voting twice.

    If the NMW is £10 ph that’s a full time wage of £19,500 without any degree for a basic job, fiscal drag on student loans have meant increased graduate tax starting at £21,500 at 9% of the gross wage.

    Will he be putting up the State pension and benefits for nine workers by 25% to match his nmw increase? What then will happen to inflation?

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, He graduated from Magdalen College Oxford, has a DPhil and is a fellow of All Souls College. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.

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