Time for higher taxes!

Calling for higher taxation used to be one of the deepest taboos in British politics. When I was drafting the 1997 Liberal Democrat manifesto, under Paddy Ashdown’s firm direction, I can recall a Labour acquaintance (we were actively talking to Labour then, since they were not sure they would win an outright majority when the election came) telling me that ‘you must be mad; no-one will ever vote to pay more’. The promise of a penny on income tax to increase funding for education turned out to be a vote-winner for us; but New Labour never dared to commit to explicitly-higher taxation, which was one major reason why their government was already running a widening fiscal deficit when the 2008 financial crisis hit. And Labour have continued to duck the issue since then, with Corbyn and McDonell suggesting that higher taxes on the very rich and corporations can bring in the extra revenue needed to fund higher public spending, without raising taxes for the merely well-off.

The dominant Conservative narrative, since Margaret Thatcher was prime minister, has been that taxes should come down. Philip Hammond has spoken of returning to lower taxation once the immediate crisis of Brexit is over; Liz Truss, financial secretary to the Treasury, has sharpened her leadership ambitions by calling for lower taxes now. The Taxpayers Alliance and the Institute of Economic Affairs repeatedly assert that it’s impractical to try to raise more than 35% of GDP in taxation – without spelling out which public services will have to be cut further to bring government spending down to that level.

Thankfully, there’s increasing resistance to this transatlantic libertarian nonsense. The squeeze on local authority spending is reaching disaster levels in its impact of children’s services, local roads and transport, even parks and public toilets. Police chiefs have public sympathy for their claims that cuts have endangered community security; parents support schools which are struggling to maintain educational standards. An Op-ed in the Times this week noted that other European economies mange very well with significantly higher tax takes than the UK; the American model, a more violent society with worse health care and life expectancy, looks much less attractive.

Liberal Democrats stand for a more honest and reasoned approach to politics, against the easy populist promises of our opponents. In the current crisis we can expect a wider welcome for a commitment to greater public investment: in education and training, from cradle to retirement, in transport, housing, research and development. British voters know that the attempt to combine the introduction of universal credit with a sharp reduction in overall welfare spending has been disastrous. They also recognise that the rising number of elderly is driving up health costs, which somehow have to be paid for.
So we can make a positive pitch for higher taxes, to support higher national and local public spending. And we should lay into the Conservative Party for shrinking the state at any cost, without caring about the future of our communities or the next generation. And we can attack the Conservatives for their toleration of tax havens and their dependence on offshore donors, as media investigations are also uncovering. Yes, we need to address the inequities of local taxation, and the case for long-term tax reform. We will want to hammer the government for money wasted on outsourcing, and their insistent preference for private providers over public or non-profit providers. The important message to get across is that good public services have to be paid for, and that progressive taxation is the fairest way to pay.

The Conservative Party has become the anti-taxation party: imposing or raising charges on the provision of public services, from access to justice to applications for citizenship, committing itself to lower taxes when ministers know very well that demand for services and public investment are rising. We should make that into a vote-winning message.

* Lord Wallace of Saltaire is a Liberal Democrat member of the House of Lords.

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32 Comments

  • Peter Martin 11th Mar '19 - 8:40am

    Will higher taxes be need in five years time, or whenever Lib Dems next get anywhere near to power?

    It’s impossible to say. It will depend on the state of the economy at the time. If inflation is a problem, then possibly yes. Otherwise definitely not. Inflation is below target at the moment to there is scope for more Govt spending without raising taxes.

    “….it’s impractical to try to raise more than 35% of GDP in taxation – without spelling out which public services will have to be cut further to bring government spending down to that level.”

    You refer to this as nonsense. And it is. But not for the reason you suggest. The implicit assumption in your comment is that Govt spending has to equal the amount raised in taxation. You should know from your own experience that this rarely happens.

    It’s pretty much impossible for an economy like the UK’s which has a net outflow of money to pay for our net imports. That has to be replenished by Govt deficit spending. So if you want a balanced budget the first thing you’ll need to do is balance the UK’s trade.

    The next thing is to do something about people in the UK wanting to save their money. If they buy Premium bonds or National Savings or even just put their money in the bank they are creating Govt debt.

  • Leekliberal 11th Mar '19 - 9:14am

    Where do we stand on the proposals in today’s Guardian from the New Economics Foundation for the tax-free allowances to be replaced with a flat payment of £2500 a year to every worker over 18 years old and not dependent on employment. It is claimed that this would help to lift around 200000 families out of poverty. We need a discussion on the practicalities of taking this bold step to make a more just society

  • William Fowler 11th Mar '19 - 9:26am

    The big question for the LibDems and Labour is does raising taxes increase the tax take.

    I would like to see the Liberals get back to their roots of individual freedom… and there is no greater freedom for an individual than owning his house without a mortgage and having money in the bank, so forcing energy costs down, phasing out council tax etc then increases that individuals freedom as he needs to work less just to service the fixed costs, freeing up more money for spending.

    I also wonder how many people who hear the 1p tax rise for NHS think they are paying an extra penny rather than one percent…

    With 740 billion to spend every year (800 billion less 60 million debt servicing), with a hefty fall post Brexit, you have to find ways to share this out fairly which will mean digging into the vast State bureaucracy to see where all this dosh is disappearing, seems to be a lot of top-heaviness in many departments with over-complex structures that need to be deconstructed and simplified, not expanded by throwing yet more money at them.

  • Joseph Bourke 11th Mar '19 - 9:39am

    Well said, Lord Wallace.

    “The important message to get across is that good public services have to be paid for, and …we need to address the inequities of local taxation, and the case for long-term tax reform.

    We should not be reticent about the importance of investment in the economy and the need for adequate funding of public services to improve living standards.

  • John Marriott 11th Mar '19 - 9:42am

    YES, bring ‘em on – and, LET ME MAKE IT PERFECTLY CLEAR, not just for the high earners! And let’s have a serious look at hypothecation. Just relying on increases in indirect taxation is not enough.

  • Joseph Bourke 11th Mar '19 - 9:42am

    Leek Liberal,

    I would advocate support the recommendation of the New Economics Foundation and agree we need a discussion on the practicalities of taking this bold step to make a more just society.

  • Peter Martin 11th Mar '19 - 11:50am

    LibDems have really got to get away from this “let’s put a penny on income tax” approach.

    We want a better NHS. Let’s put a penny on income tax.
    We want better schools and more teachers. Let’s put a penny…….
    We need more policemen. Let’s put a penny…
    We need better infrastructue. More roads, railways etc. Let’s put VAT up by 2%
    We need better pensions. Lets raise National Insurance by a penny….
    We need better social care. Lets put a VAT up by 1% and another penny on income tax.

    The list never ends. The macroeconomic effect of increasing taxation is rarely considered. It just slows the economy down and a slower economy yields lower taxation revenue. If the Government cuts its spending it again slows the economy and reduces its income. So trying to balance the budget by raising taxes and/or cutting spending never works.

    What we can ‘afford’ isn’t defined by our tax raising powers. If we have the people capable of becoming teachers we can have more teachers. Similarly with policemen, builders, engineers and anything else you care to think of. So the key is to not waste anyone’s talents by having them unemployed or underemployed. Period. As the Americans like to say!

  • Laurence Cox 11th Mar '19 - 12:38pm

    If we go back to the beginning of Margaret Thatcher’s time, the top rate of income tax was reduced from 83% to 60%, and the standard rate from 33% to 30% in the first budget. Since then although the rates of income tax have been reduced, regressive taxes like National Insurance have been increased. This means that while employees under State Pension Age are still paying an effective 32% standard rate, unearned income is only taxed at 20% and capital gains even less.

    We shouldn’t be talking about raising taxes; we should be talking about fairer taxes. The £ in your pocket is worth exactly the same whether you earned it, or received it as a dividend, or as a capital gain; it should be taxed exactly the same.

    The failing of the NEF proposal is that it will require many more staff in HMRC, because everyone will have to fill in income tax forms; at present about 20% of the adult population earn less than the Personal Allowance, many of these are pensioners.

  • nvelope2003 11th Mar '19 - 1:12pm

    Peter Martin: “If we have the people capable of being teachers, police, builders, engineers etc” but we have not got enough so what are you proposing to do about it ?

  • William Fowler 11th Mar '19 - 1:21pm

    “The failing of the NEF proposal is that it will require many more staff in HMRC, because everyone will have to fill in income tax forms; at present about 20% of the adult population earn less than the Personal Allowance, many of these are pensioners.”

    Rather than fill in an income tax form why not just sign a declaration that your income is under a certain amount… ok, have to simplify things so NI and income tax start at the same threshold but it would save realms of paper and and tax inspector’s time. (ditto for the capital gains allowance).

    I agree with other poster, tax everything at the same rates and include inherited money as taxable – doing that you might even be able to cut some rates for lower earners rather than raise them.

    Before giving every adult £2500 why not get rid of council tax instead.

    Endless possibilities for tax reform/simplification rather than fiddling with the current system.

  • Tony Greaves 11th Mar '19 - 1:36pm

    Yes yes and yes again.

  • Lorenzo Cherin 11th Mar '19 - 1:51pm

    A very fair yet outdated and rather unimaginative piece from William Wallace.

    I prefer the comments from William Fowler and colleagues.

    The intake of money can often be as great with moderate taxation r targeted cuts in tax that have a genuine stimulus effect.

    Far better to be non dogmatic on tax rates but support fairness and common sense.

    Waste is rife, ominous it can be if considered and known.

    A million to flatten a pavement down my street. It is worse because now cars can get onto the pavement and is very dangerous. Thinking behind it was to crate a friendlier cafe pavement area, reality a pitiful gimmick.

    Salaries of top officials , SPADS, thinkers, executives in councils, administrators in quango, type set ups, whole departments designed to browbeat or control, DWP, JCP, rather than put money in the pocket of people who need it, HS2, trams that duplicate buses and cost hundred times more, too many politicians, particularly the lousy devolution mess in Westminster, that sees Scottish mps responsible for less, paid as much, the nonsense of bureaucratic procedures requiring armies of admin in services like the police, etc……..

    The public need far better services an these cost money, but need it well spent.

    That is the ideology I believe in more than tax and spend, vs don’t!

  • Joseph Bourke 11th Mar '19 - 1:59pm

    Libdem tax policy currently includes the following:
    – Aim in the long-term, and as resources allow, to raise the employee National Insurance threshold to the Income Tax threshold, while protecting low earners’ ability to accrue pension and benefit entitlements.
    – Ensure those with the highest incomes and wealth are making a fair contribution. We have identified a series of distortions, loopholes and excessive reliefs that should be removed. These include reforms to Capital Gains Tax and Dividend Tax relief, and refocusing Entrepreneurs’ Relief. We would reverse a number of the Conservatives’ unfair and unjustified tax cuts, including:
    – The cutting of Corporation Tax from 20% to 17% – Capital Gains Tax Cuts – Capital Gains Tax Extended Relief – The Marriage Allowance – The raising of the Inheritance Tax Threshold
    – Take tough action against corporate tax evasion and avoidance, including by:
    – Introducing a General Anti-Avoidance Rule, setting a target for HM Revenue and Customs to reduce the tax gap and continuing to invest in staff to enable them to meet it.
    – Reforming Corporation Tax to develop a system that benefits the smallest companies while ensuring the biggest multinationals cannot avoid paying sums comparable to nationally-based competitors. We will consult on shifting away from a profits-based tax to one that takes account of a wider range of economic activity indicators, such as sales and turnover.
    – Reviewing the Business Rates system, prioritising reforms that recognise the development of the digital economy, lessen the burden on smaller businesses, and ensure high streets remain competitive.
    – We will also consider the implementation of Land Value Taxation.
    – Conduct a full-scale review into the burden of taxation and spending between generations to ensure that government policy promotes fairness between generations.

    Two substantial tax motions covering taxation of wealth and capital, and the replacement of business rates with a land value-based levy were passed last Autumn. This report discusses the proposals https://www.tax.org.uk/media-centre/blog/media-and-politics/reforming-taxation-wealth-report-liberal-democrat-conference.

  • Mick Taylor 11th Mar '19 - 2:03pm

    Let’s be clear. The LibDems can’t gain votes on a tax cutting agenda even if they wanted to. Labour, Tories, UKIP and lots of others are on that track. Quite apart from anything else, it is wholly dishonest.
    During my formative political years even the Tories supported high levels of tax and the post war agreement was to raise taxes and spend the money on services.
    Then along came Milton Friedman and Professor Laffer and first the Tories and then Labour and later still our own party became convinced that high taxes were bad and counterproductive. As a heterodox economist I think there are always different ways of looking at things and that no one theory explains economics anyway.
    It is complete nonsense to call for better services without telling people the cost. That cost is higher taxes. It will not be a popular message, but it is the truth. But what have we got to lose?
    So right on William. Let’s get our act together.

  • Peter Martin 11th Mar '19 - 5:14pm

    @ nvelope2003,

    “If we have the people capable of being teachers, police, builders, engineers etc” but we have not got enough so what are you proposing to do about it ?

    Well I suppose in the longer term we can encourage people to have more children!

    But, to be more serious, let’s think about this. On the one hand, many people are saying that the robots are coming to take all our jobs and we have to give the displaced workers a UBI because we don’t need them any longer. On the other hand, some like yourself are saying we don’t have enough people to do the vital jobs.

    You, ie the LIb Dems, can’t have it both ways.

    So the first thing is to define the problem is then we can decide how to tackle it.

  • Paul Holmes 11th Mar '19 - 5:50pm

    Agree with William Wallace (can hardly think of an occasion when I haven’t!). Agree with Tony Greaves -he thought SDP people like me should have been ‘strangled at birth’ back in the 1980’s but in reality we have disagreed on very little ever since. Agree -much to his discomfort probably -with Mick Taylor.

  • John Marriott 11th Mar '19 - 6:24pm

    As Paddy Ashdown famously said: “No taxation without explanation”. Some of us can remember when basic tax rates were nearer 30 than 20%. We also remember when higher earners were paying most of their money to ‘Mr Taxman’ (anyone remember George Harrison’ contribution to the ‘Revolver’ album?). I’m not advocating a return to the 1960s and 1970s; but surely the tax pendulum has swung too far the other way.

    So, where should we start? I would begin by with a ‘Health Tax’ with funds going directly and exclusively to the NHS. Then I would grasp the nettle of local government finance reform – that’s money raised and spent locally, based partly on earnings and also on land valuation. To those who would wish to dispute the rationale of raising direct taxation I would reply as I usually do, namely that many people in this country, despite the evidence, still expect Scandinavian levels of public services on North American levels of taxation.

  • We do have basic tax rates of 32% (when national insurance is included), 42% for higher earners and 47% for the highest income earners.
    There is no standard template for the levels of taxation. It is a political choice rather than an economic one. I think as a general rule of thumb a Liberal party should not be endorsing punitive levels of taxation and would suggest that a 50% top rate is the maximum, ensuring that the state never takes more than what is left for the earner.
    The real question for me is 32%, 42% or 50% of what. It has to include all sources of income, earned or unearned and should include tax at these rates on the rental value of land.
    Libdem plans for restoring public service provision suggest public spending of around 40% of GDP, with circa 3.5% of capital spending funded by borrowing (i.e. assuming 2% inflation and 1.5% growth). That is a level of taxation we are accustomed to in this country. Demographic changes may, however, require us to devote a higher level of national income to public services in the future.
    We have a pretty good suite of tax policies developed or under development that will deliver the kind of funding needed.
    As we tackle the issues of dramatically increased healthcare, adult social care and pension provision needed for an aging population, the issues of capital and wealth taxes will become increasingly important. A working population supporting a greater ratio of dependents will be unable to sustain ever higher rates of taxation on wages or greater shares of national income being devoted to retirees while so much of their earning are absorbed by rents or mortgage payments.

  • nvelope2003 11th Mar '19 - 8:10pm

    Peter Martin: I was just reading about the massive shortage of trained nurses. There are not enough teachers who stay in the job. There are not enough builders or policemen or workers in care homes but we do not have people willing or able to fill the vacancies although there seems to be no shortage of people willing to do certain jobs which might be desirable but are not essential. Investment in labour saving machinery has been going on for centuries as long as human ingenuity has existed and every time we are told by people like those who post on here that there will be mass unemployment and every time there are more jobs than ever. Why should it be any different now when there are already so many jobs which cannot be filled ? Even in unemployment blackspots (even like South Wales apparently) there are jobs which cannot be filled even with immigrants and they are not awful jobs but ordinary ones like bus driving. Please explain. I should love to hear what all the usual suspects have to say but of course I will not.
    .

  • If we have the people capable of becoming teachers we can have more teachers. Similarly with policemen, builders, engineers and anything else you care to think of.
    FTFY

    Really Peter, I thought you, a Brexiteer, would have known better. Without importing people, the act of raising the retirement age from 60 to 70, is increasing the workforce by 25%, we have a substantive “not economically active” population. The challenge is getting these people to firstly perceive these jobs are of value and then applying…

  • Joseph Bourke 11th Mar '19 - 11:57pm

    David Raw,

    I would say yes,we cantake it that David Laws’ 35% of GDP is officially dead and buried.

    I think Lord Wallace correctly interprets the zeitgeist when he writes:
    “…we can expect a wider welcome for a commitment to greater public investment: in education and training, from cradle to retirement, in transport, housing, research and development. British voters know that the attempt to combine the introduction of universal credit with a sharp reduction in overall welfare spending has been disastrous. They also recognise that the rising number of elderly is driving up health costs, which somehow have to be paid for.”

    As for “Which is the Norwegian Blue ? A Second Referendum or a No Deal Brexit ?” – I have no idea. I guess (hope) we will find out over the next few days. The outcome may well deternine what kind of spending review Philip Hammond comes up with for 2020-21 and possibly beyond.

  • Peter Martin 12th Mar '19 - 9:27am

    @ Roland,

    I’m not clear what you are objecting to. Isn’t it just a statement of the obvious?

    Yes we should still have immigration. Probably the retirement age will need to be extended further as people live longer. Maybe we can think about a staggered retirement more? ie Instead of having an abrupt change from working 40hrs per week and 48 weeks per year to total retirement, we can move to shorter hours and fewer weeks as people age.

    LibDems have a fundamental contradiction in their thinking on the question of work. On the one hand the robots are going to take all our jobs and so we need to pacify the displaced workers with a UBI. On the other we don’t have enough people to do the vital jobs so have to have high immigration levels.

    Can’t you have a think about this and make up your mind one way or the other?

  • I would like to comment on nvelope2003’s questions about problems of filling jobs.
    An example. There is no shortage of qualified teachers in the country – there is a shortage of qualified teachers who wish to teach. We could discuss the reasons for this, but one of them is the state control by our present Socialist Government. The recent changes in GCSE and A level exams in a good example. Changes made too rapidly with no real support. An exam marking system based on bogus statistics. Needing to work every evening and at week ends just to try to keep up, and so on.
    Bus drivers are mentioned – but to drive a bus you need a licence. You need to put up with unsocial hours. You need to drive the bus, take fares, deal with sometimes difficult passengers. Make sure you have good eyesight, and good enough health to continue.
    The problems are caused partly by our attitude towards different jobs.
    By the way the definition of socialism I am using is the one that is becoming accepted – that it is unreasonable interference by the state in the lives of people which results in killing people and remember Venezuela.

  • Peter Martin 12th Mar '19 - 9:46am

    @nvelope2003,

    “I was just reading about the massive shortage of trained nurses.”

    There isn’t. It’s just that there are too many trained nurses who’ve quit and are now working doing other things. The same with teachers too. Also the “shortage” isn’t equally spread across the country. I know, for example, it’s difficult to get a teaching job near where I live. The economy isn’t particularly buoyant, housing is still just about affordable, and its not an inner city where teaching can be really tough.

    It’s partly about pay levels but not totally. At the same time as recruiting more people for nursing and teaching we need to ensure that we aren’t asking too much of them -like we do now. They’ll just burn out and find something else to do.

  • @Peter Martin – It is unfortunate that there is no comment submission preview here – the strike through the ‘if’ isn’t readily noticeable. My point was, there is no “If”, the UK does have the people, as you noted with respect to the “shortage of Nurses”.

    There is no question that immigration will continue to happen, just that the standard economic justification trotted out to justify disruptive levels ie. shortage of workers in xyz job/sector, is in the main, a load of hogwash.

    The UK’s ‘people’ and skills shortage is largely systemic; successive governments failing to invest. An example of this is the upcoming shortage of GP’s, caused by the totally foreseeable retirement of many long-serving GP’s originally from India. Because successive governments did little to build the UK-based education/skills development pipeline, the current government is committing to significant increases in foreign recruitment (the target of 500 pa was increased to 2000 pa in 2017); and continue to underfund training…

    WRT post 60 working, I agree we need to start thinking differently, from my direct experience we probably would be well to move to a 30:20 system: first career broadly lasts 30 years, with a second roughly 20 years. A 40:10 split doesn’t seem to work so well as many reach 60 and are ‘burnt-out’ from the first career, a 50:0 split might work for some but you still have to address the problems that arise to day from people retiring from first careers at 50 and 60.

  • I believe that taxes should only be increased for people earning more than £30,000 a year. “In April 2018 median gross weekly earnings for full-time employees were £569” (https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/earningsandworkinghours/bulletins/annualsurveyofhoursandearnings/2018). Currently we can fund about £24 billion of extra government spending a year from economic growth if we manage the economy to achieve 3% growth. I would like employee National Insurance rates increased for higher earners to 12% and applied to all income.

    Joe, have you read consultation paper 137 on “A Fairer Share for All”? It seems the Working Group wants to scrap our policy on increasing the employee National Insurance threshold to the Income Tax threshold (see paragraph 2.2.8).

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