Progressive taxation to reduce the deficit

The Government wants taxation to contribute just a 1/5 to deficit reduction. A range of think tanks and The Economist are advising them to focus more on taxes.

A range of progressive think tanks and even the Economist magazine are advising the Government to reduce the deficit with a greater focus on tax rises – George Osborne has said he wants to rely on taxes for a fifth of the consolidation. But as the picture below from the Economist shows, most of the largest fiscal consolidations have seen a more balanced ratio.

In an article yesterday for Left Foot Forward to accompany a new report, ‘Deficit reduction and the role of taxes‘, Tony Dolphin of IPPR writes:

“If the government wants to be progressive, it should give a greater role to higher taxes … Which taxes go up – whether now or at a later date, also matters. Increasing the standard rate of VAT is not the act of a progressive government…

“A better option – one that shares the burden of deficit reduction around a large proportion of the population but in a progressive way – would be to increase the basic and higher rates of income tax, something that has not been done in the UK since the mid-1970s. A 3p increase in the basic and higher rates of income tax would raise £15 billion – around one-fifth of the amount needed to eliminate the structural deficit”

Echoing these arguments, Matthew Whittaker of the Resolution Foundation writes, “the deficit reduction plan must exhaust every single potential progressive taxation measure before turning to spending”. He goes on to call for a wealth tax.

Meanwhile, in the Guardian yesterday, Labour leadership candidate David Miliband writes:

“If the Tories stick to their proposed formula of £4 of cuts for every £1 of tax rises this will see departmental spending slashed by a third outside of the NHS and international development. The balance should be 2:1.”

The Tories approach is also challenged by the Demos think tank who also call for a 2:1 rather than 4:1 ratio. They urge the Government to introduce £11 billion of tax rises above and beyond Labour’s plans which included the introduction of a 50p rate and increase National Insurance Contributions. Demos propose aligning all capital gains rates with income tax rates and charging CGT on primary residences when sold; raising the basic rate of income tax by 1p; moving from per-passenger air duty to per-plane air duty; and introducing a carbon tax. Even the Economist believes that the Conservative’s plans are too focused on spending cuts:

Unwelcome though it is, a contribution from higher taxes is required. Just how big it should be is a matter of dispute. The Tories have said they want to rely on taxes for a fifth of the consolidation. That may be too ambitious. If something like 2% of GDP were found by higher taxes, leaving spending to be cut by 5% of GDP, it would still be a tougher mix than all but two of the ten biggest OECD deficit-cutters managed.

The outlier in this debate remain the right-wing think tank, Reform, who this week called for over 90 per cent of the deficit reduction to come from spending cuts.

27 Responses to “Progressive taxation to reduce the deficit”

  1. James Graham

    RT @leftfootfwd: Progressive taxation to reduce the deficit //bit.ly/d309NZ

  2. Claire Louise French

    RT @jamesgraham: RT @leftfootfwd: Progressive taxation to reduce the deficit //bit.ly/d309NZ

  3. Fat Bloke on Tour

    Will

    Good stuff on the best way to rebalance the economy — the cuts / tax increase split.

    However that is only one part of the job needed to overcome the economic fiction being put out by the ConDem Coalition and lapped up by all their upper middle class dog boiling friends in the media.

    Labour needs to expose the fiction of the structural deficit:
    Seemingly running at 8.8% of a 11.1% deficit.
    Cyclical deficit therefore being given as 2.3%.
    That is we have a deficit due to the Credit Crunch of 2.3% after a GDP fall of 6.2% over nearly 2 years leading to a GDP loss of 10/11% versus trend and this has only cost the country 2.3% of GDP.
    Any one else think this number looks suspiciously small?
    Double it and I think you would be closer to the truth.
    How can the Treasury / OBR be 100% out?

    On the structural deficit I have two issues with this method of publicising the problem:

    1) The structural deficit figure includes investment.
    The current / investment split is given as 5.3% / 3.5% investment.
    5.3% looks a lot more manageable than the figure they are pushing.

    2) What are the numbers and methodology behind the figure of 8.8 % or even 5.3%?
    Again it all looks reverse engineered to me, we have an answer now lets think of a question.

    That brings me to the output gap.
    The amount of the productive capacity of the economy lying dormant and unused at the moment.
    This is used to size the structural deficit.
    Structural deficit = Total Deficit – Cyclical Deficit
    Cyclical Deficit = 50% of the output gap this year + 20% of the output gap last year.
    The current number was developed by the OBR and they reduced the Treasury’s figure of 6% to 4%?
    Again anyone think this is nuts in light of the current economic climate?
    Just a Q+D analysis of the numbers it looks shockingly small.
    The 4% figures is being treated as the Gospel Truth even after a 6.2% drop in GDP over nearly two years leading to a loss of 10/11% of GDP against trend.

    Even worse is the OBR’s thoughts for Dec 2010.
    Trend growth is given as 2.1%, low but never mind.
    Their growth estimate is 1.3% for 2010.
    Given those numbers you would expect the output gap to increase?
    Well not according to the OBR’s Chart 3.2, it shows the gap getting smaller.
    This really is Voodoo economics for the new millennium.

    Finally back to the Tax / cuts conundrum.
    Good starting point but Labour has unfinished business here.
    Before any figures are set in stone two things need to be looked at:

    Tax changes, all the howlers left in place need to be sorted out.
    Specifically the CGT / IT / Corp Tax discontinuities so beloved by high earning chancers everywhere.

    Secondly a review of all the bloated contracts and PFI “umbrellas” needs to be looked at.
    £1.1bill to fix the A14 is the DfT and its contractors having a laugh.
    £6-7bill for SAR helicopters is procurement at its worst.

    How Labour ever allowed its civil servants to misuse an important funding mechanism is beyond me.

    Note to “Hopeful 5”,managerial competence is now top of the list of the required attributes to build a better Britain.

  4. Therese

    RT @jamesgraham: RT @leftfootfwd: Progressive taxation to reduce the deficit //bit.ly/d309NZ

  5. Mr. Sensible

    ‘Fat Bloke on Tour’, I agree with you on the structural deficit.

    Indeed, in the OBR’s predictions they said that the overall deficit would come in 0.6% of GDP lower than forecast in March, which was based on public borrowing for May coming in at £18 billion.

    And, as reported in today’s Guardian borrowing for May came in £2 billion less than that:
    //www.guardian.co.uk/business/2010/jun/18/uk-budget-deficit-lower-than-feared

    What’s more, another good place to start might be to scrap the coalition’s tax and spending plans, such as ‘Free Schools’ and the Married Man’s tax allowance.

    Indeed, I read in the Guardian today that, according to a leaked memo the government was prepared to cut Free School Meals to fund it!
    //www.guardian.co.uk/politics/2010/jun/18/school-plan-takes-money-from-poor

  6. Trakgalvis

    Progressive taxation to reduce the deficit //bit.ly/d309NZ via @leftfootfwd

  7. Anon E Mouse

    Mr.Sensible – There you go again trying to hit the poor in this country whilst agreeing to the last governments DOUBLING of Inheritance Tax for wealthy married couples.

    I ask (again x 3); Why is it OK for a Labour government to DOUBLE the tax allowance, up to £600000 for wealthy married couples, yet not take £3.00 a week less from poorer couples of their OWN money. It’s their money Mr.S, not the governments.

    Why do you repeatedly justify rewarding the rich in this manner and (seem) to care nothing for less wealthy people in this country?

    The Labour Party wrecked the finances in this country, like every Labour government before it, it lost centre left leaning voters like myself and my whole family on the way and for some reason you seem to want not to accept what comes with no longer being in power.

    If the government wants to stop millions being wasted on cars, flights, free holidays, sofas, pot plants and god knows what else… why would you have a problem with that? It isn’t there money. It’s ours.

    If by saving £BILLIONS in cuts they are criticised by you for spending a few million on their projects, as governments have a right to do it seems you ought to move to Cuba, Iran or North Korea.

    Every other country on the planet has given up on (real) socialism and not adopted the Stalinist approach to government you seem to miss. It’s over Mr.S – get used to it…

  8. Anon E Mouse

    Mr.Sensible – And those “free school meals” are not “free” – someone pays for them – obviously not you. Why can’t parents feed their own children instead of the state?

    You seem to be so upset and stressed about the Dear Leader Gordon Brown never ever being elected once as PM, that to be helpful I have a link here for you…

    //www.tripadvisor.com/Flights-g294443-North_Korea-Cheap_Discount_Airfares.html

  9. Jacquie Martin

    Anon

    I don’t want to come between Mr Sensible and yourself – you obviously have something going on in this blog.

    But, as you pointed out – you have asked three times now why it’s okay to double the IHT allowance. I’m sorry to disillusion you but it wasn’t actually doubled. It was an illusion – a trick in effect.

    It was always possible for married couples to benefit from a double allowance. However, you had to set up a tax planning scheme to do so via a trust. In reality, only the wealthy did it because their financial advisers would have made them aware of the possibility.

    What Darling did was to make it easier for couples. The thinking behind it was that property prices had risen so much, that when the second parent died leaving a family home, their children were being faced with large tax bills. He regarded that as unfair on middle England homeowners. Their wealth is usually only contained in their homes.

    Indeed there was one instance where the 80+ sister of a widow was faced with having to sell the house they’d shared, because the widow and her late husband had never set up a trust or other planning arrangements. There was no money as such – it was nominal based on the value of the property. Sadly, that didn’t stop the tax being due.

    Incidentally, I didn’t agree with it because it was restricted to married/civil partnered couples, not co-habitees.

    The marriage allowance is a different thing altogether, and I’m with Mr Sensible on this. It is a completely new tax break – not an existing one where only a select few knew about it. It’s going to cost 550m. It will only be possible to benefit if one spouse doesn’t use their allowance fully.

    I know you are arguing it’s your money you’re getting back, but you’re also getting mine as a single person. And widows, co-habiting couples, married couples where both work full-time. We’re all being told we must pay for one half of a married couple to stay at home. Particularly galling I suspect if you’re a widow. Especially as you can get it even if you’re on your fifth wife/husband.

    I find the underlying rationale somewhat sinister: that being married is better than not. That is social engineering and it’s not reflective of the current lifestyle choices that people make. There was another report out this week refuting the Tory claim that marriage is best for children.

    I found it interesting that in the 2009 conference speech, Osborne proposed removing the joint family element of CTC because we couldn’t justify the cost, but for some reason we can justify this.

    It’s an expense we don;t need right now. It’s regressive as it imposes morals on society, and reduces financial independence by reducing the workforce and forcing disclosure of personal income.

  10. Anon E Mouse

    Jacquie Martin – No one is getting your money whether you are single or not. It is LESS tax being taken if a person is married, gay or straight – you do not contribute to that. It is going to cost NOTHING – it just means the coffers will be down by that amount. Governments don’t have money…

    I’m not married but being married is better – see Frank Field and Ian Duncan Smith and if social engineering works out better for people too young to have a choice ie. children than I’m all for it.

    In fact I’m for anything that gives people more of their money to spend as they wish instead of some distant politician. I also want less state control and I have voted Labour my whole life (Interestingly I voted independent this time and Labour got in…) but after the party lied to me with Full Third Term Blair and it seemed everyone else thought that was OK I was done.

    Tell you what though I’ll go Lib Dem next time the way they are getting to grips with the cuts…

    As for previous speeches made by people well things are different now…

  11. Jacquie Martin

    @anon

    ‘I’m not married but being married is better’ I see, you want to be married. That explains everything…

  12. Paul Evans

    Progressive taxation to reduce the deficit //bit.ly/bb9jSb

  13. Will Straw

    There is an alternative to Osborne's welfare cuts & VAT rise: progressive taxation to reduce the deficit //bit.ly/dCuAH6

  14. Jack Thorne

    £4 of spending cuts for every £1 of tax rises – millionaire George Osborne scares me RT @wdjstraw //bit.ly/dCuAH6

  15. Jon Wilson

    RT @wdjstraw: There is an alternative to Osborne's welfare cuts & VAT rise. //bit.ly/dCuAH6

  16. Matt Raven

    RT @wdjstraw: There is an alternative to Osborne's welfare cuts & VAT rise: progressive taxation to reduce the deficit //bit.ly/dCuAH6

  17. Patrick Daykin

    RT @wdjstraw: progressive taxation to reduce the deficit //bit.ly/dCuAH6 how much of the deficit was made in gd yrs?

  18. Robert. P

    RT @El_Cuervo: RT @wdjstraw: There is an alternative to Osborne's welfare cuts & VAT rise: progressive taxation to reduce the deficit //bit.ly/dCuAH6

  19. David Wearing

    RT @wdjstraw: There is an alternative to Osborne's welfare cuts & VAT rise: progressive taxation to reduce the deficit //bit.ly/dCuAH6

  20. jennifer roberts

    RT @wdjstraw: There is an alternative to Osborne's welfare cuts & VAT rise: progressive taxation to reduce the deficit //bit.ly/dCuAH6

  21. Emma Jackson Stuart

    RT @wdjstraw: There is an alternative to Osborne's welfare cuts & VAT rise: progressive taxation to reduce the deficit //bit.ly/dCuAH6

  22. Cantab83

    Why not introduce a wealth tax on fixed assets, like property? I’m thinking of Vince Cable’s Mansion Tax, but with a bit more economic muscle behind it. I know his proposal of a 0.5% levy on properties over £2m wouldn’t raise that much money, but a tax rate of 2% on properties over £500k definitely would. In fact it could raise well over £10bn, and possibly double that if it was applied to all empty homes, land banks, second homes etc. It would also bring it into line with Council Tax which is currently levied at an average of about 1% on house values, but is effectively capped for homes worth more than about £500k.

    Such a tax would be fair and consistent, with those in the 40% income tax bracket being taxed on the rental potential of their property (approx. 5% of asset value) at the same rate as they are on their income, as I have explained here. It is also a tax that the rich can’t avoid. After all, you can’t move your property offshore. Surely in times of economic hardship it is better to tax those with spare cash and wealth who aren’t spending it, rather than those without who are already spending every penny they have. This Mansion Tax would be particularly apposite given that this economic mess was partially caused by the housing boom. Moreover, taxing idle wealth and nonproductive assets makes more sense than taxing productive ones.

    As for VAT, shouldn’t we increase it first for luxury goods and those with ticket prices of more that £1000, rather than for all goods?

  23. Anon E Mouse

    Jacquie Martin – I’m not married by choice – live with a feminist social worker.

    I support ANYTHING that means the public have less of their own money taken by politicians of any political party…

  24. Fat Bloke on Tour

    Mr Mouse …

    I fear that in the near future you are going live with an unemployed feminist social worker.

    At least youn are naked regarding your hypocrisy, you want to pay as little tax as possible while sharing your lifestyle with a public sector employee.

    The concept of a turkey voting for Christmas does not do justice to your rampant stupidity.

  25. Will Straw

    @joshfg Good piece. This is my take //bit.ly/dCuAH6

  26. Jamesm

    Looking at those international comparisons…. Canada now has the strongest economy in the world…. just sayin’

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