So the first big argument is over tax. Labour argues there will have to be a small increase in National Insurance contributions, as well as spending cuts, to help reduce the deficit. The Conservatives disagree, arguing that increasing NI contributions (which they describe as a tax on jobs) will be damaging and that they can close the deficit simply through spending cuts.On the immediate row over National Insurance contributions, I guess Labour are right. Any incoming government will have to raise money quickly in order to get the deficit under control and it seems sensible to do this through a mixture of tax rises and spending cuts - to do it all through spending cuts alone would have a severe impact on public services and the wider economy. National Insurance also has the advantage of being a fair tax which varies according to the amount you earn. It’s not perfect - we already tax jobs quite heavily - but it’s the fairest way for a quick fix.
But while raising NI is necessary for achieving a short term goal, it falls woefully far of the bar as a long term policy on tax. Such a narrow debate misses the broader problem – that for the last few years Britain’s tax system has not raised enough to fund quality public services, that it disproportionately hits the poor, and that it lets important areas such as wealth and carbon emissions off the hook.
A more radical approach would be for politicians to try to tackle these bigger problems. It would shift away from taxing low and middle incomes (effectively a tax on people’s hard work and effort), towards taxing wealth (much of the wealth that is generated in Britain is based on little more than the luck of rising land and property prices and inheritance from family members).
In my opinion, an ambitious long-term pledge on tax might include:
- A tax that captured a portion of rising land values and property prices
- A 50% income tax for pay slips over £100,000 a year
- A financial transactions tax or ‘Tobin Tax’
- A tax that penalised carbon emissions
These would all take a while to put in place, and until that time NI will have to be raised to plug the deficit. But they are a more sustainable solution to funding the investment this country needs, and a far fairer way of doing it.
Jonathan Clifton
Suppose we raise income tax. Consumers will have less to spend, their demand will be lower and more will become unemployed. The other half of the picture is that government will have increased income. It will spend our (taxed) money on improving the surroundings and employ more people to do it. What they spend, we don't. Thus the total numbers that are unemployed will not change.
ReplyDeleteBy making the opposite change to taxation, less tax allows greater demand for our consumables, but more unemployed government workers. So either kind of change has almost no direct effect on the overall macro-economy!
Of course, its not so simple, but by this comprehensive view the influence of a change to the amount of a production-based tax is seen as of secondary significance. As a think-tank we should not consider only one class in our society, we are concerned about what these secondary effects in a change in the tax system will do?
The secondary effect of using an increased income or purchase tax for giving more work to the government employees is to produce improvements to the infra-structure, instead of to our direct consumption and living standards. These national improvements will slowly make it easier to travel and tend to reduce our commutating/ production/ distribution costs, but at the same time they will make the land more productive. And since there are rich and speculative interests at work, it is of benefit to the land owners that government investment in the infra-structure proceeds. All increased production-based taxes have this effect.
In Johnathan's list it is only the first one where the secondary effects are beneficial in a different way. This matter can be quite complicated, many individual and company interests are involved. Indeed it is hard to avoid the politics when discussing them. All of these tax changes are production related and in total will not directly help us to escape from the present limitations in overall demand.
A tax on land values instead of on incomes will mostly affect the land owners and banks adversely, whilst giving consumers less limitation. This means that poorer people will not be much affected, middle class will have more to spend of their earnings and rich land speculators and banks will have less. This is a start in the right direction, but we should be aware that somebody will loose. It will stop the polarization of our society into two classes and the middle class will improve its situation.
Land values will drop because the effect of the land tax is to make unused land, being held for speculation, no longer worthwhile to withhold. This means a further reduction in production costs and more prosperity.
But the foreclosures of mortgaging speculators will grow and there will be bank failures and savings losses. The best way to avoid this is to gradually introduce land value taxation, thereby giving the speculators sufficient time to transfer their investments to something more worthwhile. With growing demand, it is obvious where this should be, into the shares of the new companies.
The single secondary effect that is the most significant here is that a tax on land values is difficult to hide from. Thus the army of tax collectors will be able to be thinned out and more people employed in making goods. Another secondary effect is that with more land becoming available, the opportunities offered to entrepreneurs, even those who simply wish to independently grow their own food, will flourish. This is good news, but it implies that the past fear of bankruptcy by the banks and big investors has been constraining the progress of the macro-economy by means of high land values.
I hope that by raising these matters one can see that tax matters are more significant than simply the redistribution of the nation's money. Opportunity is being constrained by our system's topology and laws that favour the land owners. The time for change has come.