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Observations - Taxes by Donald Hirsch
This month's Budget was, oddly, seminal yet not severe on taxation. It broke
a 20-year spell which said that direct tax rates can go down but not up, and
that the need to spend more was no excuse for tax increases.
Pundits were full of dire laments about a Budget that "smelt of the
1970s", "smacks of red-blooded socialism" and "soaks
every working man and woman".
Pull the other one. Is a penny in the pound really such a painful amount to
pay for a better health service? The average taxpayer was "soaked"
to the cost of about a pint of beer a week, richer people somewhat more, but
there were no specific big losers, because rises will be directly
proportional to income across the whole range. Old Labour used to increase
the rate sharply as you got richer, and then slap on another surcharge for
capitalists living on investment income. New Labour, by contrast, has
exempted such income from the rise, by taxing only wages. Not exactly the 1970s
Mark II.
Yet whether it was the Guardian rubbing its hands in glee or the Mail
pre-announcing a taxpayers' backlash, everyone wanted to convince us that
this was harsh stuff. This spin can become self-fulfilling, if voters are
given an exaggerated story of the impact. Nobody is ever quite sure why they
don't seem to have as much cash in their pockets as they'd like, and they may
turn to their papers to see how much to blame the Chancellor. There they read
stories written by people who themselves seem to have a fuzzy idea of the
difference between a million and a billion, and are much prone to statistical
fallacy. Last week's favourite was reporting the penny rise as a disguised 3p
rise in the basic rate of tax. The total increase in the tax take was
indeed as much as if the basic rate had been raised by 3p. But most of the
extra will be paid by higher-rate taxpayers and employers: for basic-rate
taxpayers, the penny costs just a penny.
Will these increases really be enough to pay the extra health bills, or is
this just the first of many rises? The Chancellor made it clear in his Budget
speech that he saw a uniform rise in national insurance rates for all incomes
as a fair way of raising money for the health service. Why not go further and
announce that, over the six years of the promised health increases, this
mechanism will be used to guarantee the funding, with the extra penny
adjusted if the need arises, but up to a maximum of, say, 3p - and falling to
zero if economic growth allows?
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26
April 2002