This week the Chancellor made an important speech about energy policy. He was able to point to a surge of new investment and large projects to find and deliver offshore oil and gas,following his tax incentives in the Budget.
His own experience of oil and gas taxation should be an endorsement for the proposition that you raise more tax and get more success if you charge rates that companies are prepared to pay. His first chosen level of oil taxation, to get the industry to make a bigger contribution to cutting the deficit, was a turn off. New offshore activity fell sharply, as oil companies ran the numbers and decided at those tax rates it made little sense to undertake risky marginal projects in the UK. The Chancellor’s change of heart got them to re-run the sums. With the new more favourable tax trateament there will be much more activity, and more oil and gas produced. That in turn will of course yield more revenue, from the extra production and the extra jobs it creates.
Seeing this work with oil taxes, the government should now ask how can they pull off this feat of cutting rates or making allowances more generous in a way which produces more revenue? Fortunately, UK tax rates on enterprises and personal endeavour are now uncompetitive, so more or less any reduction in rate is going to yield more revenue and more activity. The CGT rate is too high, so the yield is falling. The top rate of Income Tax is too high, so revenues have plunged. The government has grasped this point with Corporation tax, and is rightly cutting the rate. Their own forecasts expect Corporation Tax to be buoyant as a result. It’s time to do the same with Income Tax and CGT.
They need to carry on taking people out of Income Tax, to avoid the expensive overlap of distributing means tested benefits with one hand and removing money in Income Tax with another. They also need to look at the growing numbers of people on middle incomes being dragged into 40% tax rates when they need the cash to pay the family bills. The threshold for higher rate tax is now too low.