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By Philippe Legrain 1 COMMENT

George Osborne does not look like a convincing chancellor-to-be. Polly Toynbee’s charge that the Conservatives’ economic policy keeps zigzagging is correct. It is also true that the Tories’ tax plans do not add up. But it is nonsense to claim that deciding not to implement Labour’s planned rise in national insurance contributions would be a “tax cut” that the country cannot afford. It simply means that a different – and with luck, better – way would have to be found to fill Britain’s gaping budget hole – £167bn this year, according to the Treasury’s latest forecasts.

At a time when unemployment is painfully high and workers’ incomes are being squeezed, it is astonishing that the government – a Labour government – thinks that the best way to raise extra revenue is to increase already high taxes on labour. What is progressive about hitting hard-working people with the bill for the financial crisis?

The national insurance hike is not only unfair; it will also damage future growth by making labour more expensive and penalising effort. It will drive a bigger wedge between the cost of employing people and how much they actually take home, cutting pay and costing jobs. And it will discourage many people from working harder – and some from working at all. That, in turn, will reduce the tax take and raise spending on unemployment and other social benefits.

Existing income tax and national insurance already increase labour costs by half, according to the OECD, while a single person on two-thirds of average wages faces an effective tax rate of over 40% on every additional pound they earn. Raising taxes still further on something the government wants to encourage – hard work– is perverse. Governments of all stripes should be cutting them as far as possible instead.

There are better ways to fill the budget gap, as I argue in my new book, Aftershock: Reshaping the World Economy, which is out on 6 May.

Tax harmful things, such as carbon emissions. A charge of £30 a tonne could raise around £16bn a year and reduce emissions. That would raise as much as a 3-percentage-point rise in the basic and higher rates of tax, a similar rise in employee and self-employment national insurance rates, or a 3.5-percentage-point rise in the standard rate of VAT, according to the green budget produced by the independent and highly respected Institute for Fiscal Studies. If the tax per tonne rose as emissions fell, a carbon tax would ensure a steady source of revenue.

The government could also accelerate desirable reforms, such as raising the official retirement age. It is normal for people to work longer now that they can be productive well past the age of 65 – and unaffordable for governments to burden young workers with paying to keep sprightly 66-year-olds on the golf course. The government could raise the retirement age by three months a year for the foreseeable future, while removing the incentives for early retirement and the obstacles to working longer. It would give a triple boost to government finances, reducing pension spending, increasing the tax take and boosting economic growth. Since many people have had their retirement savings devastated by the crisis, they should be open to working longer to replenish them.

A third option is to introduce a tax on land values, as I argue at greater length in an article in this month’s Prospect. That would help curb property speculation, which diverts funds from productive investment in booms and then causes terrible busts. Shifting the tax burden from labour to land would also boost growth, according to an OECD study. Why? Because whereas taxing income from work is wasteful – less is produced, and no tax is raised on the lost output – land supply is fixed. No matter how heavily you tax it, land cannot move, or be spirited away to a tax haven.

A tax on land values would also be progressive, since land in Britain is more unequally distributed than in Brazil – there, 1% of the population owns 49% of the land; here 0.3% owns 69%. Moreover, the value of land increases each year not through landowners’ striving, but that of others. As economic activity in London has soared through the ingenuity and toil of the masses of people who have flocked there, the value of the 300 acres of fields – now known as Mayfair and Belgravia – passed down to successive Dukes of Westminster over three centuries has sky-rocketed to an estimated £6.5bn. Wouldn’t it be better to tax that windfall gain rather than the work of those who really generated it?

Britain’s public finances are in a terrible mess. Putting them right will be painful. But it is also an opportunity to have a big debate about reforming the tax system to make it fairer and less damaging to growth. The three parties could start by looking seriously at the three options mentioned above.

Posted 31 Mar 2010 in Blog, Published articles
  1. vimothy says:

    What about being really radical and not attempting to “fill” the deficit?

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