Vince Cable has been writing on matters of tax for Comment Central.
Before we get into his piece, it’s worth mentioning that he will be at the Edinburgh Book Festival on 20th August. I bought my tickets the other day (alongside tickets to see Bella Mackie and Maggie O’Farrell) and you can too, here. Here’s the blurb for the event:
Former Secretary of State for Business and leader of the Liberal Democrats, the astute economist Vince Cable has settled into life after frontline politics as a prolific author on global affairs and the world economy. Today, he talks to us about Eclipsing the West: China, India and the Forging of a New World, in which he turns his formidable expertise on the superstates mapping out a new economic order. Chaired by Douglas Fraser.
Anyway, enough for the shameless plugging and back to the article.
He starts off with a very pessimistic view of our fiscal situation:
Britain increasingly resembles Italy: an economically stagnant, ageing, highly indebted, crumbling relic with a great history.
He says that Rachel Reeves is going to have to raise tens of billions in taxes, but he doesn’t much like the idea of taxing the rich:
Labour activists have their eyes on taxing ‘the rich’: a tiny group of undesirables who, supposedly, can’t fight back through the ballot box. But, as we have seen, even small numbers of country landowners threatened by IHT can make a lot of political noise. And, as with the non-doms, rich people are not idiots: they will move to minimise their tax liabilities. Withdrawal of tax reliefs on large pension contributions sounds like an easy hit, but will have unintended consequences for national savings. There are no easy options.
So if that’s not the answer what is?
The answer would start from the proposition that Britain wants, ideally, to be a bigger version of Scandinavia: well-funded services and welfare provision; a generous and civilised approach to poverty and distress at home and abroad; an innovative pro-business, open economic environment; and high standards of living measured not just in GDP but wider indicators of wellbeing and ‘happiness’.
And how?
Several things are immediately obvious about the Scandinavian ‘model’. All have a significantly higher tax share in the economy than we do. On OECD comparisons, the UK share of tax in GDP was 35.3% in 2023, slightly below the OECD average. It is forecast to rise to 37.7% in 2027-28 following recent tax increases: as high as it has been since the war but some way below the Scandinavian level. Denmark is at 43.4%; the others all over 40% except Iceland.
A second common feature is that all have VAT rates around 25% as against the UK’s 20% (albeit with some exemptions and tiering). The Scandinavians see merit in a broadly based tax through which almost everyone contributes depending on how much they consume, adding to a sense of solidarity. In the UK, VAT is wrongly seen as highly regressive, despite exemptions or zero-rating for the necessities of life.
Third, there are also generally higher rates of income tax and higher marginal rates on top earners, as well as high capital gains tax. And enforcement is made easier by transparency. In Denmark, tax returns are published. But there is also an understanding that risk, innovation and entrepreneurship need to be rewarded, and that penal taxation of company profits makes no sense if the aim is to promote investment.
The latter point is crucial if Britain is to have any hope of moving beyond the near stagnation of the economy which makes all the trade-offs so much more difficult.
He praised Ed Davey’s approach last week of advocating breaking the link between gas and electricity and the UK getting closer to Europe again.
You can read his whole article here.
* Caron Lindsay is Editor of Liberal Democrat Voice and blogs at Caron's Musings. You can find her on Bluesky at caronmlindsay.bsky.social
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11 Comments
Yes, the Scandinavian countries have a higher share of their GDP collected in taxes than we do but they also have much lower proportions of their working age populations who are economically inactive. Rather than just focusing on increasing tax rates, we need to be thing more about increasing tax revenues by reducing the proportion of the economically inactive in our country. This approach has a double benefit to the public sector finances – increased tax revenues but also reduced spending on Welfare.
There are a few other differences between the UK and the Scandinavians.
Such as them having low cost monarchies, some function high-value champion firms, smaller focusses militaries, sane government procurement , acceptance of being in the EU Slow Lane, some rational use of wealth funds, and (some) social democracy.
Can I say social democracy?
The slow land thing and rational procurement means pooling capability – such as the Post Office – and not being hung up with delusions of Imperial Grandeur thus needing expensive fan service for a closed-shop political class.
What were the 2 aircraft carriers for again?
Thank you Vince. I wish more politicians would say that we are not a high tax country, just below average for a developed nation. Vince is right about not relying entirely on taxing wealth in people’s pockets but as Equality Trust and Tax Justice organisations point out we can raise a variety of taxes that affect the wealthy more than others. Patriotic millionaires have been saying there is a need to raise more tax from unearned income. Also according to these organisations surveys have shown only a small proportion of the extremely wealthy would move away to avoid tax rises, so there is definitely billions to be raised that way, is there not?
I must add things in politics have got completely out of proportion with such fuss over saving £5bn on welfare, when a fairer tax system could raise (so it is estimated) £60bn, so even half that latter would be a help. Then what about raises taxes to invest in ways that help create a better job situation so in the medium to long term less people will need welfare?
Tax land, it can’t be moved abroad.
“Tax land, it can’t be moved abroad.”
Quite.
Assuming that smaller areas of land would not need to be taxed, perhaps depending on location, it should not be necessary to value every piece of land for tax purposes. Start with the largest areas and tax those first.
All large areas are made up of smaller areas. If you want to avoid avoidance, you value per square metre averaged over large areas. You can gradually reduce the size of those areas until they are single plots.
@Peter Davies
How would you define ‘value’ in this case – what would it represent?
While taxing land is an important matter, it is nothing close to adequate to be a wealth tax for five simple reasons.
1) Not all wealth is held in the form of land.
2) Ever since society moved on from a predominantly agrarian one back in the middle ages, the proportion of total wealth represented by land has fallen at an ever increasing rate.
3) Apart from the small proportion of society that are too poor to own any land (or even part of a building), as personal wealth rises the proportion of wealth owned by an individual generally gets ever smaller.
4) Those organisations that provide social housing will not be able to fund payment of a wealth tax nor will their tenants without a substantial increase in benefits.
5) Not all wealth is held in the form of land. Again – for emphasis.
Land value taxation would however be a very useful mechanism stop builders from gaming the system by getting planning permission and then sitting on the land to drive prices up to increase profits. This would be a very direct mechanism to encourage them to do what they should be doing, build homes and sell more quickly.
@NonconformistRadical “How would you define ‘value’ in this case – what would it represent?” You would start with an inflation adjusted average of recent sale prices per square metre for a particular class of land (based on local plan zoning) in the wide area. e.g. domestic in Surrey. This would be quite approximate but you could introduce the tax at a low rate. As the areas got smaller and the valuations more accurate, you could raise the rate to be a significant contributor.
@David Evans: LVT is not a wealth tax, it’s a resource tax. It raises revenue, it’s hard to avoid and as you say, the changes in behaviour it results in are benign.
Most taxes produce some unwanted incentives. Earned income taxes for instance disincentivise working. A few discourage activity that we can do without (e.g. smoking). We should (if we haven’t already) maximise our revenue from those. Inbetween are a few taxes that don’t affect behaviour very much and that’s where we need to raise the bulk of extra revenue. Another example is inheritance tax (nobody turns down free money because it’s taxed). Broad taxes on investment income have significantly less disincentive effect than their opponents claim. If you raise tax on one type of investment, it appears to have a massive effect and you may even lose revenue on that tax. The money simply gets moved to other investments and if they are taxed, you add revenue there.