More tax or higher tax rates?

In opposition the Conservatives were sympathetic to the idea that the Treasury needs a more dynamic model to forecast the consquences of changes in tax rates. Many in the debate over CGT rates seem to still believe that higher rates yield more revenue, when past experience suggests higher rates may reduce the revenue.Sales of properties and shares can be brought forward or delayed, depending on the tax rates.

There is a more general point at stake here. Sensible commentators agree that to remove the huge deficit we need to collect more tax as well as cut spending. Under the old Labour sketchy plans to halve the deficit in four years, they said 80% would come from spending cuts and 20% from tax rises. However, that was only part of the story. They also said a lot of the deficit reduction would be down to faster economic growth – another way of saying they would collect more in tax as well as some cyclical reductions in public spending. Under Labour plans the total amount of the deficit reduction to be achieved by extra tax was well above 20%.

Between 1979 and 1990 there were substantial cuts in Income Tax rates, and the abolition of several smaller taxes. Over this time period the total tax collected went up by by 170%. Under the last Labour government, following a self described policy of no Income tax rises for much of its tenure, revenue went up by 125%. The rate of increase in tax revenue was faster under the more overtly tax cutting Conservative government, even after allowing for inflation.

Government has a choice – higher tax rates or faster growth of revenue. It should be obvious which we need now.


  1. JohnRS
    June 2, 2010

    "It should be obvious which we need now."

    I suspect it depends on the colour of the lens through which you view society. Those with rose tinted glasses see only rich folk who deserve to be hammered with higher rates, those viewing the world through a delicate azure haze see ways to help people to succeed, thus benefiting us all.

    I just hope DemTories have the right view of the world when drawing up their budget.

  2. Antisthenes
    June 2, 2010

    Tax rates have a tremendous effect on productivity I remember the days of high taxation, one of the consequences was that I could not get any of the workers I was in charge of to work overtime. They just observed that to do so was as good as working for nothing as most of the extra money would go to the government.

    June 2, 2010

    We know that inflation is a monster in waiting – well already on our doorstep from the latest figures.

    However – and we speak as naive economists (not that this makes the 'experts' any better given recent performances!) – is inflation not working in our favour in reducing our enormous deficit?
    If folk can cope with low or non-pay rises whilst managing to pay higher prices is this not a less severe way of helping UK finances get back into shape?
    Certainly none of us who lived through the terrible years of 20%+ inflation in the 70's would ever chance going there again but if we kept inflation at say 4% for the next 4 years and pay rises at say 2% how would that affect the overall deficit please?
    And could we therefore maintain the ultra-low interest rates borrowers and investors are currently enjoying and are necessary to promote growth.

    Given the low value of the £ and our reliance on imports we may have no option but to adjust to higher than target inflation it would seem anyway so why not seek to make a virtue of it?

    Any comments would be really appreciated.

    1. Mike Stallard
      June 2, 2010

      Inflation – yes, we all have been saying that on this blog for ages.
      Deflation, however, is simply – poverty. If you haven't got any money, then prices have to go down to meet you. In Wisbech, for example, a house costs a lot less than it does in Mayfair. In Norway, which is not encumbered by the EU, a Big Mac is £12!
      In Zimbabwe, where racial policies have destroyed the economy completely, money is worthless and prices are rock bottom – for basics – and astronomical for everything else.
      We could do either b or c if we aren't careful.

    2. StevenL
      June 2, 2010

      This seems to be the plan. The squeeze is going to hit all over Europe. Wage deflation and commodity price driven inflation.

      There'll probably be a public sector pay freeze, 3 – 6% inflation and lots of strikes.

      This doesn't alter the fact that the credit machine is broken, nor does it remove the desperate need for more private sector driven growth.

      It'll be tough.

    3. alan jutson
      June 7, 2010

      Essex Girls

      Yes inflation is fine for those who are in debt, and I well remember the 70's and 80's when it was sensible for many to borrow as much as they could, for as long as you could, but some of us (I think the majority) are not in debt, and have savings and investments.

      What is the point of saving and paying your own way, if the returns are going to be negative.

      We are rewarding the feckless and punishing the prudent, should not it be the other way around to encourage responsibility.

        June 7, 2010

        Thanks Alan.

        We take your point on the different impact on those with and without debt. However, as the UK seems to be deeply in hock and as the state of the finances affects borrowers and lenders alike, is there a way of assessing how much net inflation with static wages – as an enforced team effort and in conjunction with all the other necessary measures – will reduce our current £160bn deficit?

        You and other regular contributors – not to mention JR himself – are far better qualified than us to provide a stab we reckon…

  4. Sue
    June 2, 2010

    Let's just leave the EU, that will save us a ton of money. It's not only the money we directly give to the EU but also the amount it costs the country in extra legislation that is crippling us.

    What happened to stopping the funding of "fake charities" and "quangoes?".

    Why should WE pay for governments mistakes in extra taxation while you all sit there in your huge houses and enjoy more perks than I will ever have the good fortune to experience in my life.

    Cut civil servants pay, leave the EU, stop all overseas aid, get rid of scrounging foreigners and illegals and we would have enough jobs, houses and money to ensure the "British" are ready to rebuild their Sovereign Nation.

    We want our referendum on the EU!!!!

  5. Matthew Burton
    June 2, 2010

    I think this article is a really sensible commentary on the requirements of the British economy and one that many politicians would do well to consider. There are a couple of points that would need further consideration in all of this however.

    It should be noted that although undoubtedly the Conservative government cut income and corporation tax it also raised very heavily other taxes such as VAT. The overall % tax take from the British economy was largely unchanged from 1979 to 1997 although undoubtedly there was a significant real terms increase during this period.

    The debate I believe should therefore become more of getting the balance right to maximise our growth and our overall tax revenues.

    Clearly there is a risk that CGT take will fall with an increase in rates but then is it possible to analyse the corresponding increase in Income Tax or Corp Tax take due to differences in the way people handle their tax affairs ? The equation is very complex and although you raise very valid comments, I don't believe it is as simple as your blog suggests.

    I personally believe there are great benefits to the economy in raising the threshold of income tax to £10,000 in terms of increasing aggregate demand and in improving marginal rates of taxation for people on benefits.

    The government has a great challenge to find the right balance in acheiving this aim whilst ensuring any increases in CGT only affect non value adding speculation.

    I think your letter and blog are excellent additions to this debate.



    1. John Wrexham
      June 5, 2010

      Good reply, matthew. it's always good to read someone making cogent remarks and it's reassuring to know there are conservative blog readers out there who don't froth at the mouth each time they hear the word 'europe' nor blame brussels for all our troubles.

  6. oldtimer
    June 2, 2010

    The first budget is the opportunity to be bold and to set out the road map for reform of taxation. Simplification should share space with measures which are more likely to raise overall tax revenues than just raise headline rates.

    A useful start would be to reverse the 50% top rate and reset it at 40%. It has already driven higher earners abroad. My daughter in law tells me that she has seven friends who have taken this step because of the 50% rate. These are people young enough and able enough to work elsewhere under less punitive tax regimes. These are the people that the UK needs back here again – to benefit from their skills and the tax revenues and spending power they generate.

    A second useful step would be the adoption of your taper scheme for CGT.

  7. Robert George
    June 2, 2010

    Ultimately I would like to see a single flat rate of income tax with many less taxed at the bottom end at all. The few jurisdictions which have followed this route get virtually no avoidance by high payers and they will pay the lions share.

    1. John Wrexham
      June 5, 2010

      Do you have a list of countries that have adopted the flat rate approach? We can’t judge its efficacy as a policy otherwise.

  8. Jack Davies
    June 2, 2010

    Your argument about a higher rate of tax on high incomes is paper thin. Why not admit the reason you oppose such a tax is that it would not benefit rich people – those who are a priority for you. CGT at a higher rate, which you oppose so strongly, would tax those who can afford to pay far more, and help the rest of the country who cannot. You also make the frankly ridiculous point of pointing to the 1980s as a good example of how to manage taxes – that decade culminated in the introduction of one of the most unpopular and unfair taxes in living memory.

    This is a point of principle, as well as of basic common sense. We have a large public deficit, and it needs to be paid for by those who can afford before cutting vital public services affecting the most vulnerable people in our society.

    1. Paul A
      June 2, 2010

      Oh dear Jack, when will people like you put your rabid jealousies to one side and look at the real world?

      Super rich and wealthy people don't pay any or hardly any tax at all. They have armies of specialists to find ways of not paying.

      The only people who this hurts are the people who would have provided you and yours with a job.

      On the poll tax you are right of course the great unwashed rioted over this and eventually got it removed. Well done, we now pay DOUBLE the poll tax rate but we are all happy with that as its a) not called a poll tax b)was introduced by a socialist government so that's ok then.

      Here is a fact for you. If the government removed the imposition of employers NI I would immediately grow my workforce by 20% without any impact on the prices of my products.

    2. John Wrexham
      June 5, 2010

      Thanks for adding a bit of balance into the debate.

      A lot of people are uptight about CGT as they see it as a double tax ie you pay tax on money that has already been taxed. It's not a good reason to oppose the rise in CGT, because as far as I am aware most people pay VAT, Fuel Duty etc from their taxed income, unless someone can tell me a cunning way how i can make my purchases from my pre-tax income.

      I am sure it was Michael Heseltine and John Major who introduced the current version of the council tax and they would object to being described as socialists. For all its theoretical benefits, the poll tax was rapidly turning out to be one of the most expensive taxes ever to actually collect and you'd have had to establishe a police state with compulsory ID cards to get a collection rate even close to a simple tax on property. Let's hope the new coalition don't bother with the Lib Dems' daft idea for a local income tax!

      As for the super rich and their tax avoidance, a mansion tax and a private airliner tax might be the way forward. of course, if global warming continues, most of the tax havens in the caribbean will disappear underwater (so it's not all bad news), the germans are dealing with liechtenstein and i am sure the french will look after the channel islanders if their 'governments' refuse to play ball.

  9. Anand
    June 2, 2010

    CGT on second homes should be crippling, I am sick of property spivs driving up house prices to the point where I cannot afford to maintain a roof over my head.

    Mr Redwood, when are you going to acknowledge that house prices have gone potty and were the primary cause of much of the financial crisis.

    When will you vent your anger at the extremely loose monetary policy maintained by the bank of england in a veiled bid to stoke a house price bubble, a stock market bubble, a giant debt bubble and make people believe we lived in a world of ever lasting boom?

    fact is, we are where we are and I for one want to see this new asset price bubble well adn truly burst.

    There are many very generous tax free investment and savings vehicles outside property prices, housign should NEVER have been allowed to be used as speculation towards retirement.

    Why not admit you are now a vested interest and your sole priority is to keep the baby boomers sitting pretty on our future childrens wealth?

    Reqply: there is plenty of past criticism on this site of monetary laxity which caused a ridiculous asset bubble. The way to sensible house prices is via a sensible money policy, not via higher taxation.

    1. StevenL
      June 2, 2010

      He's got a point, he was calling Mr King out on raising rates into the crisis too – which I'd certainly agree in hindsight was JR 1 MK 0.

    2. John Wrexham
      June 5, 2010

      Perhaps we need to introduce CGT for primary residences at the basic rate with all the usual sensible allowances to take account of improvements made to the property and have a higher rate for second properties. It shouldn't be possible to claim mortgage interest relief on buy to let properties either as home owners have gone without out that benefit for many years.

      1. alan jutson
        June 7, 2010

        John Wrexham

        CGT on Primary Residences.

        And pray who would trade down (perhaps downsize in retirement/death of a partner) who would move house for a job to another area if you were taxed on any inflationary gain.

        Some people do not house hop, they may have bought a property 20 -30 years ago, what tax rate would you have them pay, and what would you expect them to buy with what was left after moving expenses, stamp duty etc.,

        Think again the reality of your suggestion.

        Most people buy a home to live in, no other reason.

  10. GJ Wyatt
    June 2, 2010

    Calling it "dynamic" is a misnomer. It is feedback because the tax base is endogenous. Tax revenue is the product of the tax rate and the tax base. But the tax base declines as the tax rate rises, with an elasticity that depends on the scope for avoiding tax by making suitable arrangements. Obviously quite high in the case of CGT, as you point out. This is the much maligned Laffer curve. Who can believe the Treasury isn't aware of all this? It is the public that needs to get it. The message has been drowned out by the soak-the-rich fantasy of Labour and Libdem numbskulls

    By the way has the coalition tacitly accepted Labour's woefully inadequate plan to halve the deficit in four years? The aim should be to eliminate the deficit tout court. If it is only halved the debt mountain will still be growing fast, even expressed as a percentage of annual GDP. And the official public debt is just half of the unfunded liabilities left for future generations.

  11. Ian Jones
    June 2, 2010

    I agree tax rates should fall but we need to be careful that taxation does not distort the economy as it does now. How can it be good for an economy for a buy to let to create more "wealth" and less tax than someone who works? Housing is a restricted good by Govt policy yet tax policy encourages excess demand thus distorting the economy and moving capital away from productive assets.

    By all means cut taxes but at least make it fair so those who invested in themselves in order to get a good salary pay the same tax as those who simply borrow to invest in another asset.

    1. John Wrexham
      June 5, 2010

      HOORAY!! Someone talking some real sense that accords with honest Conservative values .

  12. Martin
    June 2, 2010

    One thing sure a foreign government has its' "boot on the the throat" of the dividend taxes that BP normally pays. "Special relationship" ?

  13. waramess
    June 2, 2010

    Your arguments in favour of leaving Gordon Browns CGT rate untouched at 18 percent have been well documented, but why tax CG at a different rate from dividends?

    Given that income from dividends and capital gains are realised only after significant risk has been undertaken and it is your stated aim to reinvigorate the economy, why not exempt both forms of income from tax.

    We do not need higher tax revenues nor do we need higher tax rates, what we need is smaller government, or is this all a bit too much to hope for?

    1. John Wrexham
      June 5, 2010

      I don't reckon the shareholder's risk is any greater than those taken by the employees who work in the same business and it is people's skills and talents which make a business profitable. You can work for a private business, it goes bust, you don't get paid and your pension vanishes, yet you will have paid tax on your income and you'll be a long way down the list of the creditors. Most investors take risk into account when making their investments based on the old adage – speculate to accumulate.

      Pretty well every form of economic activity involves risk, so your logic is to only have taxes on expenditure. Are there any countries that rely on such a system?

      1. waramess
        June 6, 2010

        You are clearly neither an investor in shares nor in start up companies.

        Were it peoples skills that make a business profitable we would all be company owners and all made rich by the people we employ.

        No doubt employees take a risk but it is a different type of risk that they are obliged to take if they wish to avoid starvation (although these days even that has been changed).

        My point is that if we are to encourage people who do not have to take risk to do so we should take care not to unduly penalise them.

  14. Mike Stallard
    June 2, 2010

    Tax: there is a seriously nasty side to modern Britain. It is envious of the rich, qua rich, unless they happen to be celebs. Even then there is a strong desire to unseat them and bring them down.
    The "politics of envy" are most unpleasant and also counterproductive. But, I imagine, they do bring votes in.
    So the completely correct idea for everyone of light taxation, which is actually paid, flies in the face of "I know my rights" unpleasant Britain.
    Once again, the Labour years were a time of the rich getting a lot richer and becoming much more Southern European in their attitudes to giving tax dues to the state. And I loathe that: your pain = my gain.

  15. niconoclast
    June 2, 2010

    Income tax,corporation tax and capital gains tax are Socialist so why would you support them?Also are you happy with 65% tax on petrol? Strange way of coming at Conservatism!

    1. John Wrexham
      June 5, 2010

      As income tax was first introduced before the Labour party existed or Karl Marx wrote Das Kapital, there is a slight problem with your argument.

      Business has always paid tax: market tolls, road tolls, bridge tolls, ship money, salt taxes, wool taxes etcetc. Customs & Excise had been around a long time imposing its taxes on businesses and trade before it was merged with the Inland Revenue. Even the Good Lord said 'Render unto Ceasar that which is Caesar's' or words to that effect and he wasn't talking about making a voluntary donation to the retirement home for Roman legionaries.

      1. waramess
        June 6, 2010

        The problem is that taxes have indeed become the norm and people expect to have to pay a lot of them, often in order to satisfy the social conscience of politicians.

        Beware of government, the smaller you can make it the smaller will be your tax bill and the more control you will have over your life.

        Nothing wrong with road tolls or even road taxes which you can avoid paying by going on foot, The most objectionable taxes are those taken from you by force and the expenditure over which you have no control.

        Given the extent to which the Labour administration penalised the poor during their term of office they should certainly not be confused with socialists as you seem to in your response

  16. John Wild
    June 2, 2010

    Hi John

    I'm the guy who started the fish & chip business in Dec 2009, how about a smaller rate of VAT applied across the board to everyone? (or all businesses that would pay VAT?)

    My simple logic is that looking in the trade journals of Fast Food businesses for sale, there is a suspicious number of them that seem to trade "just under" the VAT threshold. Call me a cynic, but my new shop is not mega busy, but I am on target to be shortly paying VAT. I don't know what the treasury model would come up with, but how about VAT of 10% everyone starting from the 1st pound of income, so at least we all have a level playing field, and if anyone was trying to "suppress" their income to stay under the VAT limit (God forbid!) this would be eradicated. Surely the VAT take would go up?
    I do appreciate that a higher rate would kick in at say at £250.000 and apply VAT at the normal rate of 17.5%.

    Just a thought. I look forward to getting shot down in flames, but it's an idea.

    1. Mike R
      June 3, 2010

      Nice idea.

      I'm also in the takeaway industry and get so frustrated by certain other shops not having to charge VAT – whether it be sandwich shops, burger bars, supermarkets or chippies.

      It must be the same in other industries – growth stifled by the inequality of one business paying VAT but taking not much more sales income than another similar business not having to pay tax … what incentive is there to grow?

      A standard VAT rate of 10% as you suggest across the board (from the first pound of income) would surely lead to a fairer system, less inclination to 'stay' below the threshold and most likely an create overall income benefit to the Treasury – and probably popular to boot!

      I'm not convinced there should be exceptions either … those on lesser incomes or with children receive assistance separately, and those support methods could be adjusted if deemed necessary to compensate. The whole VAT system would be simpler, cheaper to manage and provide more Treasury income.

      Surely a 'no-brainer'!

    2. John Wrexham
      June 5, 2010

      Sounds very sensible, though i'd keep the VAT rate at 17.5% from the start and lessen some of those taxes on businesses that take no account of your turnover or the state of the economy such as business rates and planning permission charges.

      It might be a good idea to scrap this ridiculous divide between paying VAT on food you eat in and not when it's a takeaway. the rest of us have to then pay to clear up after all the litter produced by the takeaway industry and its clientele. it's time for the polluter pays principle to be applied to our food industry.

  17. BillyB
    June 2, 2010

    Where are our CGT rates in comparison with our European competitors? Isn't that what is important?

  18. Lou Pole
    June 3, 2010

    True. In your speech to the house you talk about entrepreneurs being on strike in difficult tax environments. Well, business people make countless decisions based on the risk reward ratio. Higher tax means less reward and results in investments not being made because the risk is too high i.e Capital on strike.

    I think Labour's plans to reduce the deficit were sketchy because they knew they were unlikely to be in a position to execute them.

  19. Duncan
    June 3, 2010

    @John: As a LibDem and one not long over 20 you've only really appeared on my radar before as a boogeyman from the Major years; this is the first time your ideas have received a lot of coverage in my properly-adult lifetime. I have to say, you talk a lot of sense.

    That said, surely the changes in behaviour in response to taxes is the kind of thing which can be modelled and to a certain extent predicted. This is why the debate on the capital gains tax changes should be subject to close scruting and discussion using the testimony of leading economists. I take your point that considerations of fairness might make us wish to exempt pensions and the like from capital gains tax increases (or at least attenuate the effect). I also take the point that CGT increases might modify behaviour in ways which actually decrease net revenue and no one wants that. But the latter case is certainly unproven and more to the point, as people have been reminded by the Danny Alexander pseudo-incident, the Taxation of Capital Gains Act has a number of exemptions, modifications and grace periods to the actual rate which could be used to limit the impact of the changes to particular items subject to CGT so as to avoid negative alterations to behaviour as regards those particular items if it looks likely they will take place.

    The choice is not between higher taxes or increase revenue, it is always (and only ever) between foolish taxes or increased revenue; it is possible (logically, at least) to increase CGT with a view to avoiding effecting revenue-decreasing behaviour*.

    *Here's a free example. Suppose, like you say, people wish to avoid paying CGT on something so they defer. You can avoid that by making the rise staggered, so it has risen by such and such in year 1 but will rise by more in year 2, year 3 and so on; this creates a strong incentive to act now so as to avoid further taxation later.

  20. Anas Hassan
    June 3, 2010

    I think we need you as Chancellor John! Here's why:

  21. Javelin
    June 3, 2010

    I just do not see the necessary £150 billion cuts being made any time soon. Let's be optimistic and say £30 billion year on year cuts for 5 years (and we're left with a £60 billion a year interest payments) and a further 5 years of £20 buon cuts to nibble away at the debt.

    I just don't see the first £60 billion occurs happening in the next 2 years. Given the employment laws, red tape on job creation, public sector contracts, private public partnership contracts etc.

    I just don't see the £150bn being found.

    Can anybody show me where this is coming from?

    1. Javelin
      June 3, 2010

      Just wanted to add I see QE returning in Q4 as the Government tries to prop up the economy following shocks in EU and the domestic economy due to debt problems.

      But let's face it – QE returning will be a desperate attempt to shore banks up, keep the credit markets liquid and prevent a double dip. But it will only be temporary patch on an otherwise gaping wound.

      1. Javelin
        June 3, 2010

        Sorry to keep adding responses. But the UK is very similar to the US 2 years ago. US states have been cutting state budgets for the past 2 years. More they will be cutting next year as well. Yet the US is only just coming out of recession.

        More importantly they are raising taxes now. For example Penn State is going to start taxing smoking and shale extraction. So the answer in the US is more taxes.

  22. John Wrexham
    June 5, 2010

    Reducing the top tax rate from 98% and 83% down to 40% was always likely to bring in more tax as people probably declared more income and made less effort trying to shield income from the taxman as these tax avoidance schemes do make it more difficult to use your money. However, just because cutting tax raises more income in one situation in the past, does not mean it would necessarily do now. the logic of saying that cutting tax brings in a higher tax rate will meet the law of diminishing returns coming the other way sooner or later.

    the government might be better advised to tackle the many other business costs that were imposed by the last government which do far more to inhibit private sector activity than the exact level of corporation tax. the latter is a tax on profits, what we should want to do is to free up more businesses to actually make a profit. calling for CGT to be kept lower than Income tax for BTL landlords and cutting corporation tax won't really do much to improve the economic climate for business. they would much prefer lower employer NI contributions, an end to all the admin involved in tax credits etc, a simpler VAT system, fewer tick box regulations, and countless other costs that have been detailed by people more knowledgeable than me!!

  23. Andy B
    June 6, 2010

    Forgive my ignorance and naiveté but exactly how many taxes are there in England?

    Why so many?

    Are they merely knobs for certain people to tweak and turn depending on the expediency of the moment?

    Government has three purposes:-

    The armed forces, the police and the courts.

    Everything else should be funded privately.

    How much does it need to provide those three things?

    Work that out and then decide how much, as a percentage of earnings, of every individual who enjoys them (everyone) needs to be paid in order for those to be provided for everyone.

    This then means that National Insurance is the only real "tax" that needs to be applied.

    Surely by now someone must have realised that "tinkering" doesn't work?

    I sell something to a person who is willing to buy. That is business. It is no more and no less complicated than that.

    In order to protect my life and my business, I will pay a "government" a percentage of the profit I make on that transaction.

    Other than that, stop tinkering and stop the fancy words that suggest that such tinkering is necessary. I have a lot of time for you John Redwood but you are NOT necessary for me to make a living in this world and that applies to ALL of your contemporaries and colleagues.

  24. christina sarginson
    June 15, 2010

    This debate rolls on and on. It is a very difficult line to tread whether to tax people so much. Many people would argue that the UK is taxed enough; on what people earn and what they buy, and in the case of business, corporation tax and much more. I am not sure if many people can take being taxed much more.
    The balance of the economy is a matter of perspective I think. If I use this metaphor I hope it makes sense, if a person is overweight and wants to lose the excess weight they would be best to go on a diet and do it over time rather than cut off their arm. I think we can relate this to the economy, the government needs time and ensure that the public sector can still service the public, the cuts need to be carefully managed to avoid cutting of any of our limbs the recovery needs to be managed with care and attention

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