Friday, 2 May 2008

Taxing alternatives

A short while ago I posted an article proposing a solution to the abolition of the 10p tax rate of abolishing tax credits and investing all savings into boosting the personal tax allowance substantially. Cllr David Green has proposed his own alternative solution to the abolition of the 10p rate, through a 7p increase on the 40p upper income tax band and giving the personal tax allowance a modest increase, or alternatively a lesser increase on the upper income tax band and an increase on capital gains tax.

The key flaw is that it is the ideologist rather than the more sensible and thoughtful part in Cllr David Green driving the policy, retaining high spending and high taxation, aimed directly at the ‘rich’, whose crime has been simply to have more money than the ‘poor’. Why should the Government punish those earning over £36,000 simply for earning a fair salary? I suspect he is falling into the same trap as Brown did by abolishing the 10p rate in the first place. He thought it’d be OK because of tax credits without having the foresight that there were so many who do not and cannot claim them. Taxing the rich is as ever a blunt instrument that will bludgeon everyone in that tax band, not just those City bosses who make up a tiny proportion of that section of Britain. He argues that the tax increase “won’t much damage the wider economy”, an argument that given the current financial climate could be seen to be optimistic. Lower incomes will get their tax relief but will have to spend that on paying off their own domestic bills or the credit cards such is the high cost of living. Those on higher incomes may well be able to cough up the taxes but they will have the same problems as those on lower incomes. It also ignores the economic rule known as the Laffer Curve where above a certain level, kicking up taxes can actually lead to lower tax revenues. Everyone is finding it hard, not just the poor and it is wrong to ignore those on middle earnings.

A key issue ignored is that of high levels of spending requiring such high taxation in the first place. We need effective public services and they need to be funded by the taxpayer, but that investment must be targeted where it is needed, rather than sprayed everywhere without consideration of the potential damage being caused by such profligacy. The Government plans on spending £618 billion of taxpayer’s money on the various departments in this financial year, with an eye wateringly high £169 billion on social protection. That’s over 27% of all Government spending going on benefits and other such spending and the equivalent of spending on defence, education, transport, housing and the environment combined. A radical spending review and sensible cutting back on the fat in public spending could lead to tens of billions freed up to allow changes to reinvigorate the economy. Furthermore, such changes can be made without hurting frontline public services.

Where is the ambition? An increase to the personal tax allowance of £1200 will undo some of the damage caused by Labour and will pay off some of the money the Treasury has stealthily taken from them through fiscal drag but effectively its just putting things the way they were and for some it will take a long time to get full recompense. In the meantime, Labour has blown the extra tax revenue already and has moved onto eating heavily into borrowing.

Cllr Green’s idea is based upon a flawed and outdated political concept and does nothing to tackle the frittering away of billions of taxpayers money by this Government. Back to the drawing board

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