In Place of Cuts: Tax reform to build a fairer society

Inexplicably Britain has moved from a credit crunch and an economic recession caused in large part by the excesses of bankers to a public expenditure and public services crisis. Those at the top have been bailed out by the public, while those at the bottom will have pay and benefits frozen and services cut. We simply cannot allow this to happen.

Across the three main parties there is a Dutch auction about spending cuts. The Tories and Liberal Democrats are the worst but Labour is not sufficiently differentiating itself. This report directly challenges this sort of Micawberesque economics which bizarrely and quickly has become the new orthodoxy. In this report we show not merely that cuts in spending in the midst of a recession is a bad idea, but also that any ‘hole’ can more sensibly be financed through tax reform which makes the current system fairer.

Britain urgently needs tax reform. Overall tax incidence in Britain is currently regressive: taxes fall more heavily on the very poor than on the very rich, so contributing to growing income inequality. Regressive taxation – together with relatively low social benefits – places Britain close to the bottom of the EU league table in terms of fairness.

Tax reform is also needed to finance public spending. As many commentators have noted, Britain cannot have high level Nordic-style public services with low level US rates of taxation. Yes, bailing out the banks has added billions to the public borrowing requirement (PBR), doubling our indebtedness. But priority must be given to modernising public services and to major investment in a newer and greener economic and social infrastructure. Far from ‘crowding out’ privatesector growth, such investment is an essential prerequisite for sustainable future growth.

Cutting public expenditure by 8% of GDP (by £120 billion over the period 2011–2014) as advocated by some politicians would be a disaster. Far from restoring prosperity, such a move would condemn Britain to a ‘lost decade’ much like Japan in the 1990s. Private investment demand depends on aggregate demand – including both public investment and public consumption – rather than simply the rate of interest, and balancing the budget would shrink aggregate demand.

Increased investment for sustainable growth – ‘green Keynesianism’ under current conditions – requires progressive tax reform for another important reason. Many green taxes are indirect (for example, those on fuel or on congestion) and thus regressive. Gaining public support for the introduction of green taxes means making direct taxation more progressive. If only to offset this effect, tax reform is an essential component of a green new deal.

Finally, we show how tax reform could finance Britain’s structural deficit in the medium term, by which is meant between now and 2014, assuming the UK emerges from recession in the coming year.

The quantified reforms proposed in this report more than cover the estimate by the Institute for Fiscal Studies (IFS) of an annual structural budget gap of £39 billion per annum for 2011–2014, or about 3% of current GDP.2 The IFS says that only by radical cuts to public spending, tax rises or some combination of the two can the ‘structural’ deficit be resolved.

We oppose spending cuts of the sort announced by the Chancellor in April 2009 for the period 2011–14, cuts likely to be extended in his upcoming pre-budget statement in autumn 2009. Moreover, we think that tax reform would alleviate the need for further cuts recommended to plug the £45 billion gap forecast by IFS for the period 2014–18.

Our recommendations would raise additional revenue equivalent to roughly £47 billion (all figures are annual) over the next four years (Table 1). This is enough both to reduce the government deficit (although we strongly oppose ‘balancing the budget’) and, more importantly, to finance a major green investment programme. Crucially, the cumulative impact of these reforms helps the bottom 90% of income earners as only those who can afford it, the top 10%, are asked to contribute more.

There are nine key measures for 2011–14:

1 Introduce a 50% Income Tax band for gross incomes above £100,000. This raises £4.7 billion compared with the current (2009/10) tax system, or an extra £2.3 billion compared with introducing this band at £150,000 as proposed by the Chancellor.

2 Uncap National Insurance Contributions (NICs) such that they are paid at 11% all the way up the income scale (although pensioners would continue to be exempt); make NICs payable on investment income. This results in further revenue of £9.1 billion.

3 In addition to (1) above, introduce minimum tax rates of 40% and 50% on incomes of above £100,000 and £150,000 respectively; these raise an additional £14.9 billion.

4 Introduce a special lower tax band of 10% below the poverty line (below £13,500 per annum), while restoring the ‘basic rate’ to 22%. This costs £11.5 billion.

5 Increase the tax payable (higher multipliers) for houses in Council Tax bands E through H (while awaiting a thorough overhaul of property valuation and local authority taxation) raising a further £1.7 billion.

6 Minimise personal and corporate tax avoidance by requiring tax havens to disclose information fully and changing the definition of ‘tax residence’; these two reforms are estimated minimally to yield £10 billion.

7 Introduce a Financial Transactions Tax (FTT) at a rate of 0.1%, applicable to all transactions. This would raise a further £4.2 billion.

8 Immediately scrap a number of government spending programmes (including ID cards, Trident, new aircraft carriers, PFI schemes), reforms totalling £15.1 billion.

9 Urge that all current small limited companies be re-registered as limited liability partnerships to simplify their administration and reduce opportunities for tax avoidance……..

for more download at Compass Publications

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