Pain for gain? The £176.8 billion tax hike

I was glad to hear this morning that the Conservatives intend to inject some hope and optimism into the government’s narrative. You can overdo the dire warnings about cuts to come, especially when the plan is to increase public spending each year for the next five years. If they do announce difficult cuts in particular departments and programmes it will be because the public sector is unable to manage with a 6% cash increase this year and another 2.5% next year.

I have long been pointing out that over the five years of this government’s plans total public current spending will rise by an annual £92.1 billion from the last Labour year. I should also add today that over the same time period tax will go up by £176.8 billion a year. In the last Labour year they collected £479.7 billion in tax. This government plans to collect £656.5 billion in tax in 2014-15. ( Budget Red book forecast p 100). The annual tax increase by year five of the planned increases will be £3000 for every person in the country or £12,000 for a family of four.

I look forward to Conservative Ministers dealing robustly with those who like Ed Mililband think there is scope for yet more tax increases. Mr Osborne has already proposed raising more than 20% of the planned deficit reduction from tax increases, and has made tax increases do more of the work in the first two years.
This morning we learn that maybe 1 in 4 hedge fund managers has already changed their personal domicile to avoid 50% income tax, whilst some whole funds have also gone, taking their substantial tax payments with them. Many politicians do not like hedge funds. They may discover there is one thing worse than having them in your tax jurisdiction, and that is to lose them.

Looking at the figures it is very difficult to claim that the Uk is undertaxed, or that tax is not carrying more than its fair share of reducing the deficit. The Chancellor wisely backed off from putting CGT up to 40% or 50%, realising that such high rates would result in less revenue, not more. He should also do some more analysis of the impact on revenue of our current income and capital tax rates. I think he would find on any sensible analysis that he would raise more tax if the rates were set at more competitive levels internationally. I always say we need to tax the rich more, and the way to do it is to lower the rates.

In 1989-90, Maragret Thatcher’s last year as PM, total taxes raised brought in £190 billion. It’s quite a thought that the Coalition government plans to raise taxes by almost as much as total taxes 20 years ago.

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    Posted October 2, 2010 at 10:38 am | Permalink

    John – in which fringe events will you be participating or keeping a close eye on in Birmingham please?

    I am launching the Freedom Zone at Conference at 9 am on Monday and speaking there immediately after the opening. I will do a post on my appearances this morning.

  2. oldtimer
    Posted October 2, 2010 at 11:09 am | Permalink

    I agree with everything you say. Next years budget will be as critical insetting the tax agenda as the forthcoming spending review will be in setting the government`s spending agenda. If the Coalition get it wrong, and drive yet more people and businesses abroad through the tax regime, then they will be doomed to failure. Despite my advancing years, I will be very tempted to follow them.

    • Mike Stallard
      Posted October 2, 2010 at 8:00 pm | Permalink

      It was very obvious at a family funeral yesterday that the men in their fifties were not doing well if they worked here in the UK. On the other hand, those who were working abroad were actually stinking rich.

  3. Mark Wadsdworth
    Posted October 2, 2010 at 11:29 am | Permalink

    "I always say we need to tax the rich more, and the way to do it is to lower the rates."

    Yes of course, even better, reduce the rate of income to nil and replace it with taxes on land values :-). Exempting pensioners from LVT would be a political necessity, of course, but this is a minor topic and does not change the logic.

    This would be "a dagger to the heart of property values" but is that really such a bad thing? The highest earners will always end up living in the nicest houses and paying most tax; and poor people will always end up living in the smallest or cheapest houses and paying the least tax, whatever you do and whatever system you implement.

    • John C
      Posted October 2, 2010 at 11:35 pm | Permalink

      "The highest earners will always end up living in the nicest houses and paying most tax"

      Warren Buffet still lives in an old ramshackle of a house he bought decades ago with his (deceased) wife and, last year, still drove an 11 year old car.

      He gave $20 billion to the Bill and Mellisa Gates Foundation.

      When asked why, he said "I know how to make money. Bill knows how to give it away".

      He is the type of capitalist I like.

      Totally unlike the sociopaths that inhabit the financial sector and the higher echelons of some FTSE 100 companies.

  4. Fox in sox
    Posted October 2, 2010 at 11:34 am | Permalink

    Dear Mr Redwood,

    if you want the right people to be made redundant in the public sector then it is nessecary to revise the compensation for unfair dismissal. Read about the case of Dr Michalak in Yorkshire. She worked for a few months, took maternity leave, returned to work, was unfairly treated by her colleagues, then took three years off sick. She won her case of unfair dismissal against the Trust and looks to be being awarded more than a million pounds in loss of earnings. Is it reasonable?

    Whatever the rights and wrongs of the case (and she did win it) the compensation seems to assume that she will never work again. If compensation were limited to, say, one months salary for each year worked, with a six month minimum, then this Trust could afford not to cut.

    The new Equality bill will be a nightmare of compensation claims for employers. If the compensation is reasonable, but not lavish it would prevent vexatious claims. If we want to create jobs then employers need to be able to manage their workforce without compensation suits stretching to millions.

  5. P H
    Posted October 2, 2010 at 11:51 am | Permalink

    Absolutely – 50% tax rates on top of NI, VAT, IHT, Stamp Duty, Climate Levy, Insurance Premium tax, import duties, fuel duties, alcohol duty, landfill tax and the rest are completely mad. They would raise more at a maximum of perhaps 30%.

    Who will invest in the UK knowing that even it they invest well they will struggle to beat, after tax, inflation and when they die they will take yet another 40% of your labours.

    Start by abolishing 50% rate and abolish Inheritance tax – to send a clear sense of direction to everyone that Tories are not New Labour with a new face. They welcome investors and business for the benefit of all.

    And stop wasting cash on mad wind farms and PV Cell subsidies – can no one in government do the basic sums that show without doubt that these are truely pointless even if you do believe in the devil gas CO2 (harmless plant food) they still make no sense.

  6. Mark M
    Posted October 2, 2010 at 11:51 am | Permalink

    The best way to tax the rich more is to get more rich people in your country.

  7. Ian Jones
    Posted October 2, 2010 at 3:27 pm | Permalink

    Inflation will account for most of the rise in tax, currently at 5% and not falling. 5 years at 5% gives you a 30% rise.

  8. Mark
    Posted October 2, 2010 at 5:00 pm | Permalink

    Looking at the Red Book assumptions in Table C13 there are some optimistic projections. Self assessed income tax to rise by 71% over the period to 2015, Stamp Duty by 176%, CGT by 72% are perhaps some of the less likely outcomes. Of course, when tax revenues fall short of projections that will re-open the whole budget equation. In some cases, it may be possible to increase yields by reducing rates – but where the yield loss is the result of corporate or personal emigration it will take much longer to build up the base of taxpayers than it takes to lose them. In other cases it will become clear that the extra tax simply can't be raised (for example I would be astonished if the Stamp Duty estimate is reached unless we suffer galloping general inflation, because neither the number of transactions nor the price level are likely to be anywhere close to the assumptions of a return to a bubble market).

    That will in turn open up questions about the levels of spending that can be afforded. It seems likely that cuts will need to be made to the current spending total projections. I think that Cable has already as good as admitted that the 50% tax is actually leading to revenue loss. Will he be pragmatic, and agree to limiting its life publicly soon to stem the haemorrhage?

    It looks as though the budget projections for GDP growth might be attained – but at the expense of almost all the growth in nominal GDP being due to inflation at 5% p.a. It seems more doubtful that the economy will sustain the projected levels of taxation.

  9. Stuart Fairney
    Posted October 2, 2010 at 5:17 pm | Permalink

    Yep, I was only thinking this morning after filing both cars with petrol at a cost of some £120, "You know what, taxes are just too low"

  10. Mike Stallard
    Posted October 2, 2010 at 8:04 pm | Permalink

    When i was teaching the causes of the French Revolution there was a neat little diagram showing the clergy and aristocrats both very fat hanging on the back of a really thin peasant. They paid no taxes, you see, but lived very richly.
    Today we pay more than that peasant – over 50%.
    So what happened to the 1,000,000 outreach/Guardian reading/non jobs that were floating round in the early years of the millennium? Have they all remained?
    And what about all the quangocats? About half of them are still there!
    Some cut backs!

  11. waramess
    Posted October 4, 2010 at 11:29 am | Permalink

    What is clear and will, over time become even more clear, is that as the tax revenues fail to rise and actually start to fall when tax rates are increased then the government will be forced to raise more and more money from the less rich and the poor.
    It is a very poor policy the Coalition are seemingly committed to follow and the thought that it will lead to growth and then to a natural reduction of the deficit is plain wrong.
    The only policy to follow is to cut the public sector and not simply to rearrange deck chairs.
    The easy way to do this is through privatisations, the tough way is pretty obvious.

  • About John Redwood

    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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