Opinion: Property and consumption taxes need to rise to fix the fiscal mess

Politicians everywhere are being urged to get real about the fiscal mess. For the last month, this has meant a bitter dispute about the government’s spending figures. Who will cut the most? For any numerate observer, the debate is trivial: a rising bill for interest payments and the social security budget make it inevitable, no matter what contortions Brown attempts in disguising the figures, and no matter who is in power.

CentreForum has just published a new report about Britain’s fiscal mess, called A balancing act: fair solutions to a modern debt crisis. It is called “a balancing act” because politicians need to balance competing factors – rather than mindlessly cutting the deficit in total disregard of the economic and social costs. And the debt crisis is ‘modern’ because the threat of deflation renders the context different from that of any previous post-war recession.

The debate is now unbalanced in favour of spending cuts, overlooking the question of how to restore the tax base. This is a serious oversight. The fiscal hole opened up because taxes fell through the floor. Don’t believe the small state conservatives who claim that Britain is over-taxed – in fact, public sector receipts will soon be as low as they’ve been since the 1970s.

The crisis provides an opportunity to fix things. Britain’s tax system doesn’t work. Its dependence on one-offs, like a booming financial sector, made it dangerously insecure: a hundred billion disappeared from forecasts in just a year. Any finance director presiding over such a flaky business model would have been fired long ago. It has also encouraged instability, by leaving property relatively under-taxed, exacerbating the housing boom.

Any solution that ignored tax rises would not be fair. Conservatives like to claim that the debt crisis is all about out-of-control spending . Therefore, only the public sector should take the pain of paying it back. This is nonsense. A good portion of the future debt has arisen because the government interposed its balance sheet between the economy and a deflationary Armageddon. Whether they recognise it or not, the wealthy have benefited from the consequent expansion of public debt, even if they don’t use public services. To pin this entirely upon the public sector would be to ask the poor to foot most of the bill.

So we call for tax rises to help plug the gap. An increase in property tax – through a levy on more valuable homes, and removing the exemption from capital gains tax of primary residences – is a good way to do this without hurting economic growth. It also dampens house price fluctuations, something the UK desperately needs. VAT must also rise, in due course. This is less progressive, but does at least help rebalance the economy in favour of saving, without bunging more money to the wealthy in the form of fresh tax-incentives.

We’re keen to know what you think – please read the report, or come over to Freethink to debate it.

* Giles Wilkes is Chief Economist of CentreForum, the liberal think tank.

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8 Comments

  • Both eventually need to happen – smarter taxation and, eventually, lower taxation. I dont’t see how consumption taxes are going to help much, stifling the trade and growth that will be required to rebuild the economy. Government can only take from the productive sectors of the economy so holding them back is going to do nothing to help.

    On property taxes, I am obviously with Mark on this – any increase must only be on land values and not property values. Again, the construction sector is one of our most important and will be even more so in future. It needs to be freed up from the disincentive of taxation on capital improvements.

    But more importantly the long term way to a lower tax, lower state interference and more equitable model is to shift taxation onto land values and away from productive economic factors of labour and capital (and thus also consumption).

    I believe Centre Forum has supported this in the past – is it resiling from that now? If so, why?

    LVT would be the single most important change towards emerging from this period of austerity a more efficient, lower tax, smaller stae and more equitable shaped economy for the future. Anything else will end up compounding our problems leaving us uncompetitive coming out the other side.

  • Tom Papworth 13th Jul '09 - 1:04pm

    I agree that the government should not “mindlessly cutting the deficit in total disregard of the economic and social costs” but what about doing so mindfully. The deficit is a millstone around the neck of every taxpayer, it has negative effects on economic growth (which means on job creation and wage increases) and creates a serious danger that governments will seek to inflate it away.

    It is also not true that the deficit is something that is unavoidable and results from the current economic crisis. The ratio of government spending to GDP rose from 41.8% in 1999 to 45.8% in 2007 before the downturn commenced. The suggestion that “public sector receipts will soon be as low as they’ve been since the 1970s” is simply not true (though taxes are lower than they might be due to the government’s willingness to borrow and so pass the tax burden onto the next generation rather than take the honest and prudent approach of paying for expenditure out of current taxation).

    The idea that there is not room to reduce government expenditure is simply absurd. Whether it is big-ticket items ( ID cards and ballistic missiles) or ongoing costs, there is a lot that government could cease doing or fund more efficiently and less wastefully. We are right to focus on spending cuts; CentreForum is wrong to deny that truth.

  • Matthew Huntbach 14th Jul '09 - 11:26am

    Until recently it was politically impossible to talk about property tax. The Liberal Democrats were the worst of the lot on this issue with our campaign for yet more tax on income and the abolition of the one remaining tax with some property element (the council tax) on the grounds that income tax was the only tax that was “fair”.

    Any talk of taxing property or wealth obtained from property ownership was condemned as an unacceptable attack on the ideal of property-ownership. To suggest it was to get one condemned as a throwback to the socialism Mrs Thatcher had abolished.

    I am glad to see that now there are people who clearly can’t be written off as old-style socialist putting seriously the case for shifting taxation from employment to property. About time too. Actually, too late to save us from the current crash, hope something can be done before the next boom makes talking about it impossible again.

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