Why there is nothing illiberal about cutting taxes

The decision by the Liberal Democrats in 2010 to include as part of its manifesto, and subsequent coalition negotiations, the raising of the income tax threshold was the culmination of years of debate in the party about whether to cut taxes or increase public spending.

Because tax cuts are more often associated with right wing parties, there is a tendency to view them as profoundly illiberal.

But actually cutting taxes enforces a profound liberal principal, that of devolving power, the power to spend their slice of the wealth in the economy,  down to the lowest possible level, that of the individual, and away from the centralised state. That increases the power held by the individual relative to the state, and so is surely as liberal an idea as can be.

Of course, that principle only applies when the taxes being cut are those of lower earners, the wealthy already have a lot of power relative to the state, and are not likely to benefit by having some more.

So tax cuts for lower earners  increase the freedom of the individual to do something.

That is not to imply that choosing the route of higher public spending is illiberal. Whilst at first glance it is a route that involves taking a slice of an individual’s freedom in the short term. If the cash is spent properly and in the public interest, then it will increase the individual’s freedom from things that make them unfree, such as poverty, and so is also liberal.

Tax cuts for lower earners can be economically efficient  because it pushes cash into the hands of those most likely to spend it quickly, boosting economic demand. And increases in public spending are economically prudent if deployed at the right time and in a sensible way.

So the debate shouldn’t descend into deciding which one is liberal, but rather which one is most appropriate for the economic conditions of right now.

Tax cuts were very useful in 2010 and onwards, because the consumer was in shock, and borrowing conditions were tight as a consequence of the banking crisis, so any boost to wages was sensible. The UK government’s borrowing costs would also have been much higher if an exceptional rise in public spending had been announced, so a balance of deficit spending and tax cuts was prudent.

Now? Well wages are again squeezed, but unemployment is very low and the Bank of England expect inflation to be temporary. Those are the ideal conditions for increased borrowing to fund capital projects.

This is because whilst inflation and economic growth is picking up around the world, inflation is low. So the cost of borrowing is cheap, and there is plenty on which to spend the money.  Very low unemployment boosts the case for this because it should mean there is less pressure on current spending, leaving more headroom for the big ticket items.



* David Thorpe was the Liberal Democrat Prospective Parliamentary Candidate for East Ham in the 2015 General Election

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  • Angry Steve 19th Jun '17 - 7:48pm

    If I hadn’t given up hope of the Lib Dems ever returning to being a progressive, informed, liberal party that I can again vote for then I would argue with you.

    Just carry on as you are.

  • Nothing wrong with giving the poor more Steve just as long as it isn’t at the expense of removing their safety net. Poor people spend the money they get, rich people don’t so perhaps raising the tax free rate is a positive as long as the money is recovered at the top end.

  • Angry Steve 19th Jun '17 - 8:02pm

    As I said, frankie: carry on. The sooner the Lib Dems reach oblivion the better.

  • Eddie Sammon 19th Jun '17 - 8:18pm

    The Personal Allowance increases should have stopped at £10K and the National Insurance thresholds raised instead.

    In general I agree that tax cuts are sometimes liberal. Taxes can reduce disposable income and push self-employed people into tax debt. People say that we should manage our finances better, but it’s easier said than done if things go wrong with your business or you fall ill and suddenly have to spend your tax savings on rent or other bills.

  • David, I’m really very sorry, but I would have thought getting 1.6% of the vote in East Ham in 2015 (admittedly better than the 1.2% your successor got in 2017) might just have persuaded you that there wasn’t much of a market for trickle down neo-liberal economics.

  • Lorenzo Cherin 19th Jun '17 - 9:02pm

    Some here are missing the point.

    There is nothing illiberal or regressive , but is liberal and progressive , when implementing targeted tax cuts for liberal and progressive reasons.

    To cut the tax of the rich is trickle down rubbish, to do so foe the poorer or for business to specifically target investment, is progressive.

    The late great President Kennedy , whose centenary some of us have been well aware of and which has been marked with great events , in the US , was the best example of what I allude to , and David might be keen on.

    Having created the range of progressive and impressive programmes such as Medicare, and the many such as increases in social security and unemployment entitlement , the economy he inherited, not doing well, with rising unemployment, he and his advisers, felt needed a boost. Taxes went from twenty per cent on low earners to , yes, ninety per cent !

    Kennedy cut them from fourteen to sixty five !

    He , as well as cutting personal taxes thus, cut corporation tax from fifty two to forty seven !

    H was distrusted by the business community prior to this , and ongoing many thought him too progressive, but of course the centre right now like to say he was conservative , but they have neither the facts or figures to show it , as can be seen !

    Stimulating a stagnant economy and putting money into the pockets of those who spend it , can increase revenue to government if part of a general stimulus or optimistic programme.

    I would suggest we are not encumbered with high taxes as the late great Kennedy , and the American people were then, so it is not as necessary as , government expenditure now is , which is very !

  • paul barker 19th Jun '17 - 9:28pm

    Who is Steve & why is he angry ?

  • David Hopps 19th Jun '17 - 9:42pm

    “There is nothing illiberal about cutting taxes”
    Well, no, in theory.
    But if the Lib Dems were to believe that this is an option at the moment, as well as the fact that some members are still in denial about inequality, I would struggle to remain in this party and like many – except with great reservations on my part – decamp to Labour.
    The social fabric is under strain and in many parts of the country people are hurting.
    We had a chance to address this with radical, clear policies and we failed to do so, leaving Labour to win votes with policies that many do not believe in, but supported because they feel something has to be done.

  • Angry Steve 19th Jun '17 - 9:58pm

    “Who is Steve”

    I’ll come clean – it’s me.

    “& why is he angry ?”

    Thanks for asking. I’m angry because I’m a centrist who would regard a party such as the Lib Dems as a natural home for my vote. I voted Labour in 1997 and 2001 but could have equally voted Lib Dem. I very much welcomed the rise of the Lib Dems as a party at the time because of my centrism and because I believe in plurality. In 2005 and 2010 I voted Lib Dem for several reasons including the irrational, destructive neo-con foreign policies of Blair, the drift towards the economic right, far removed from the centre-ground, mixed-market approach that Blair had actually advocated in the 1990s. Then the Lib Dems went into coalition and were even more economically right wing than Labour (despite the 2005 and 2010 manifestos which were economically to the left of Labour) and just as blinkered in terms of foreign policy. That made me quite irritated, especially with regards to the incredibly destructive and punitive tuition fee system that was introduced by the coalition.

    Then, the world went mad with Brexit and Corbyn. The Lib Dems became completely unaware of the vacuum of quality political centre/centre-left arguments being advocated within mainstream parties that gave rise to a complete incompetent like Corbyn becoming popular (but not popular enough to ever win an election because he can’t build support in the centre-ground). And then, the Lib Dems only make small gains in 2017 because of Farron’s reluctance to form or convince people of a radical alternative to the right-wing, small-state nonsense that has failed so spectacularly to return the public finances to surplus because it was based on nothing more than a hatred of the public sector.

    Then, the Lib Dems unseat their leader on the basis of, as far as I can tell, an irrational, illiberal campaign against Farron based on what people presume to go on inside his head on the basis of no evidence. The economic liberals in the party then seem to keep quiet instead of rising to his defence, because it’s convenient.

    I have nobody to vote for and I’m actually quite a sensible, reasonable person. That’s why I am angry.

  • David,

    i see nothing illiberal with reducing the tax burden on the poor and increasing it on the rich. I agree with Eddie that national insurance should be prioritised for an increase in the level at which employees pay it, but not employers, that way the poor still get a stamp toward their pension and other benefits. Making work pay by actually making it worth while and not trying to beat people into work by benefit cuts and sanctions whether they are able or not is liberal as far as I’m concerned.

  • David thorpe 19th Jun '17 - 10:14pm

    I love the argument that because of the vote I got as a paper candidate in an election two years ago it proves something. I was a paper candidate-I spoke to no voters there and instead went to help elsewhere. That’s what the party told me to do.

  • I think there is a quote in Yes, Minister that the treasury does not decide how much to spend and then work out to spend it but tries to raise as much as possible and then spends it.

    There are many questions in taxation. And in general governments try and pick our pockets as silently and painlessly as possible! And then there is the question of borrowing. Personally I back keeping a moderate deficit at less than about 4%-5% of the total debt it will be shrinking as a percentage of GDP.

    It is worth remembering all the different ways we are taxed. Indirect taxes VAT, duties, charges, petrol tax. And of course national insurance about 22% above £8k reducing to about 12% at £45k. And on the other side tax credits and personal allowances. And there’s council tax – very unfair to those on low incomes and should be replaced BT a local income tax. And we pay every tax more than once through higher prices in the shops.

    Obviously if things were not paid for through taxes then we would have to pay for them directly health and unemployment insurance, pension contributions, scool fees, to get bins collected. And some things are more efficiently provided collectively ignoring congestion a road is there if one car uses it or many. And equally a creacking infrastructure can be a greater cost to the economy than spending tax pounds on it.

    And then there is borrowing the short term I would keep it at about 3%-5% annually of total debt as that means total debt as a percentage of GDP will fall. In essence the political argument is very narrow even between labour and Tories may be over 5-10% of spending if that.

    To discern Liberal Democrat principles in all this is difficult. I would suggest that we actually did quite well in government. I would highlight
    Personal allowance tax increase
    Universal state pension provision above “poverty level”
    Universal free school meals for infants.
    Maintaing real term spending in the NHS and schools
    In the futute I would
    Tackle high marginal rates of tax for the lower paid and replace council tax
    Universal free school meals for all primary school pupils
    2%-3% real terms increase in NHS and school s
    Free university tuition fees
    Tackle social care with more funding and a cap on costs of £25k-£50k.

  • EDDIE KIERNAN 19th Jun '17 - 11:28pm

    Parts of this country and sections of society are being torn apart by the ideological crusaders in the Conservative party.Their war on spending and on public services will damage this country in ways that will take decades to repair.The almost religious belief in an ever smaller state is illiberal,Cutting taxes is not illiberal if public services are properly funded and the safety net for the poorest and those most in need is working.Public services are being hugely underfunded and the safety net is failing miserably,So yes right now we need tax rises,the burden must fall on those most able to bear it.The poor are not helped out of poverty by food banks,I see struggle every day of the week in my community and i want to believe that my party has some of the answers ,that my party is on the side of those that need help.I have voted Lib Dem since i was 18 in 1992 and been a member for 10 years i describe myself as Social liberal / Social democrat i detest the Neo Liberal Thatcherite small state at all cost rubbish we are now seeing from the constant drifting further to the right torys,we need to oppose them or this is no longer my party. Rant over.

  • David Evans 20th Jun '17 - 1:06am

    David Thorpe – and how well did the Lib Dems do where you went to help in 2010?

  • Giving tax cuts to the poorest in society is definitely liberal, but cutting taxes for the sake of it is unlikely to be liberal because it benefits the powerful and richest the most and does not improve freedom equally to everyone.

    David Thorpe stated, “The UK government’s borrowing costs would also have been much higher if an exceptional rise in public spending had been announced, so a balance of deficit spending and tax cuts was prudent.” This prediction is like all predictions no one knows if it is true or not. What we do know is that interest rates were at an all-time low in 2010 and so borrowing was very cheap especially for the government. We also know that if a government wants to stimulate economic growth it should invest, but David Laws pushed to cut the investment parts of government spending in his less than 3 weeks in the Treasury.

    David Thorpe also stated, “unemployment is very low”. I disagree, it is at 4.7%, a reasonable level would be 3% and a very low level would be under 1% as Germany had in about 1970. As well as the 1.58 million currently unemployed there is over 2 million people who receive other out of work benefits who if the economy was run for their benefit and if the support they need is provided some of them could be employed.

    He also stated, “Very low unemployment boosts the case for this (borrowing) because it should mean there is less pressure on current spending, leaving more headroom for the big ticket items.” This proves he is not a believer in Keynesian economics which reduced inequalities in the 1950’s 60’s and 70’s.

  • Sure, they’re liberal or can be. But they don’t actually work very well and usually lead to higher indirect taxation which is passed off as benign (health, environmental) and works even less well!

  • Simon McGrath 20th Jun '17 - 7:40am

    @Lorenzo – President Kennedy didnt bring in medicare nor did he cut taxes nor bring better social security. All of those are the achievements of that great ( but flawed) liberal Lyndon Johnson

  • Peter Davies 20th Jun '17 - 8:30am

    There are three areas where tax on income is destructively high:
    Withdrawal of Universal Benefit (Marginal rate 65% rising to 76% where it overlaps with NI and Income tax).
    Withdrawal of child benefit starting at 50k (varies with number of kids but 72% if you have 4)
    Withdrawal of personal allowance starting at 100k (62%)
    If you want to eliminate those rates, you need to put up the oddly low rates:
    Inheritance (0% for most people)
    Capital Gains (well below other investment income with generous allowances)
    and you probably need to put up the standard rate as well.

  • The Lib Dems in the 2010-15 government prioritised cutting taxes. That came at a price of increasing NHS funding at historically low rates. Had it increased at 3% above inflation (lower than the average in the 79-97 Tory government then the NHS budget would be about £11bn higher than it is today.

    Then for the 2017 election the Lib Dems said they would increase taxes to “properly” fund the NHS with an extra £6bn.

    It’s hard to see the consistent thread in this.

  • Richard Underhill 20th Jun '17 - 9:23am

    There is a principle. People on the minimum wage should not be paying income tax.
    Simon McGrath 20th Jun ’17 – 7:40am This is about ‘guns or butter’. Johnson spent heavily on the Vietnam war by running a budget deficit, thereby creating the Eurodollar market, of US dollars outside the US.

  • Simon McGrath 20th Jun '17 - 12:12pm

    @Richard -I’m afraid I have no idea what point you are trying to make

  • Sue Sutherland 20th Jun '17 - 12:39pm

    I am confused. I read the article as promoting tax cuts for the lowest earners not the wealthy but some people are taking it for support of the trickle down theory which I too find completely unbelievable. Just how long does a trickle take to get down?
    It makes sense to me to cut taxes for low earners so they can spend on things that aren’t just essentials, though some people have to use food banks because they don’t earn enough, but I’m not an economist so I don’t know the counter arguments.
    David is also advocating borrowing for capital investment which we would have to do to provide enough decent housing for people. I agree with that too. Are there undercurrents that I’m not aware of? If David is a former economic liberal who is changing his mind and seeking to fund social liberal projects then all I can say is: welcome to the bright side.

  • Peter Martin 20th Jun '17 - 1:12pm

    ” …. inflation is low. So the cost of borrowing is cheap, and there is plenty on which to spend the money. Very low unemployment boosts the case for this because it should mean there is less pressure on current spending, leaving more headroom for the big ticket items.”

    Mmmm! Not quite! The cost of borrowing isn’t cheap because inflation is low. Its cheap because interest rates are low. Interest rates are what Govt choose them to be. If they want 0%, 3%, 10% or whatever they can have it. Interest rates aren’t determined by supply and demand as many might think.

    Very low unemployment doesn’t boost the case for more Govt spending. Just the opposite in fact. If Govt spends too much when the economy is at full capacity it will simply create more inflation. But the unemployment figures over the years have been massaged to such an extent to be scarcely credible. Underemployment also has to be considered. The economy is nowhere near full capacity. There’s plenty of scope for additional spending without causing excessive inflation. But probably not in the SE of England.

    The spending needs to be targetted towards the more depressed regions to be sure of avoiding that. Otherwise we just add to the London bubble economy !

  • Lorenzo Cherin 20th Jun '17 - 1:43pm


    You are wrong, all devised and developed under Kennedy , as was civil rights, Johnson, not so much a Liberal, but a statist , social democrat, and neo con, gets credit for an inheritance too often.

    The bill Medicare was the successful conclusion of, started as discussion under Ike, then was a ground breaking on the whole , though mainstream, legislation, that failed under Kennedy to get through congress.

    The tax changes, were developed in 1962, at the behest of Kennedy, then put into effect 1963.

    There was much that got through as a result of a guilt feeling congress paying tribute to a president they had not always backed on key things !

  • Joseph Bourke 20th Jun '17 - 2:47pm

    Peter Davies makes a good point about the withdrawal of Universal Benefit (Marginal rate 65% rising to 76% where it overlaps with NI and Income tax).

    Finland are currently running a pilot of universal basic income http://www.economist.com/news/business-and-finance/21723759-experiment-effect-offering-unemployed-new-form.

    it will be interesting to see how this works.

  • Peter Martin 20th Jun '17 - 4:45pm

    @ David Thorpe,

    You could also have called the article “The is nothing illiberal about spending more” . And you’d be equally right. Whether we spend more or tax less to keep the moving is just a matter of political choice.

    We have to bear in mind that “borrowing”, for the government essentially means borrowing back their own IOUs. That’s not really possible when you think about it. If you want to think about it a little more, try working out what Keynes had in mind when he wrote this:

    “If the Treasury were to fill old bottles with bank-notes, bury them at suitable depths in disused coal-mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of repercussions, the real income of the community, and its capital wealth, would probably become a good deal greater than it actually is.”

    He wasn’t actually suggesting that we should bury money in bottles BTW!

  • The basic theory that reducing the tax burden for the poorer end of the spectrum frees them to spend on useful things for themselves is fair enough, but only if we remember that reducing tax income often leads to cuts to services for the very poorest and most vulnerable, and then requires the moderately poor (the sort the cut is supposedly aimed at) to spend more of their own money to compensate for the cuts to services that are no longer available to them. And then there are the well off who use the tax savings to bolster their bank account, or to spend on their foreign holiday, doing no good to the local economy.

    Then we all get to argue about what income makes you rich, or poor, and someone will unhelpfully point out that a million pounds can barely buy you a shed in (a fashionable part of) London. While ignoring the massive advantage those who can access the bank of mum and dad have over those whose parents are also struggling, and that income is just one part of the equation.

  • Laurence Cox 20th Jun '17 - 7:22pm

    We need to be asking ourselves a more fundamental question about taxation. Why is it considered equitable for an employee to pay 32p in the £ (20p income tax + 12p NI), while someone receiving share dividends or savings interest only pays 20p and someone whose income comes from capital gains only 18p? It should be obvious that it is the richest who can make use of these other sources of income, so it is regressive to tax them at lower rates than employees pay. If we are going to be liberal about taxation, then we should be taxing all sources of income equally, because they are worth the same to the recipient.

  • Cutting taxes is completely liberal. It allows the individual to have more control and make their own spending decisions.
    Laurence Cox makes an excellent point and one that no party appears to acknowledge. Labour talk of a fairer society by taxing those earning over £80k. However, the richest in our society are not ‘earning’ a wage through work, they are making money from investments.

  • Graham Evans 20th Jun '17 - 10:43pm

    @ Lawrence Cox: Because in theory NI goes towards the cost of benefits which employees receive, such as state pension, job seekers allowance, state sickness benefit, maternity pay. (Gordon Brown even raised it by 1p to pay for increased NHS expenditure.) This is why pensions are subject to tax but not national insurance contributions. The reason why savings are only subject to tax is that they will usually have resulted from earned income already subject to tax and NI. Moreover governments want to encourage people to save to provide for their future and for emergencies and a 32% tax rate would probably mean that people’s savings would lose their value in real terms. The argument is broadly similar for dividends, plus the fact that the company profits out of which dividends are paid will have already been subject to corporation tax. Moreover the recent changes to the tax treatment of dividends held outside an ISA have actually increased the tax payable for those with divided income in excess of £5,000 pa. I think the capital gains tax arrangements are less easy to justify. Of course capital gains on property is subject to a 28% rate, not 18%. Gordon Brown introduced a tapering arrangement which involved a starting rate of 40% which gradually dropped the longer you held the investment (though he abolished the inflation allowance which used to reduce the net capital gain.) I actually think this system was better as it encouraged long term investment rather than short term speculation but it was the LDs in Coalition who promoted the current system as it did increase the tax take compared with Brown’s system. There is an argument for rationalising tax and NI but it would have a big adverse affect on existing pensioners. Also bear in mind that the tax treatment of ISAs and pension funds (SIPPS, etc) further complicates the situation.

  • Peter Bancroft 21st Jun '17 - 12:49am

    Lawrence, your calculations on dividends compared to salaries are using incorrect numbers and aren’t like for like.

    Assuming you’re not on either end of the income bell curve you are indeed paying either 20% or 40% income tax plus 10% NI reduced at around the higher rate band.

    If you are a company owner who chooses to pay yourself dividends instead you will first pay 20% on your profits and then 7.5% or 32.5% (higher band) in dividend tax.

    For comparison, that means basic rate taxpayers would be paying around 30% by salary vs. 26% by dividends. So if you earn less than £43,000 you could in theory save a few percent.

    For higher rate earners the marginal taxation on your salary is 42% between £43,000 and £110,000, but if you choose to pay in dividends you’re taxed at 46% meaning that taking a salary is actually cheaper.

    You hear time and again how comparable dividend taxation needs to be addressed as it’s unfairly cheap, but it’s simply not true.

    * None of this includes 10% employer NI contributions which further complicates comparisons

  • Well informed comments by Graham Evans and Peter Bancroft on personal taxation. There is a good article in the Buttonwood column of the Economist this week on the issue of corporate tax http://www.economist.com/news/finance-and-economics/21723407-changing-rates-does-not-make-lot-difference-getting-most-out-business.

    The article argues that changing rates does not make a lot of difference and opens with the statement “One of the hottest debates in economic policy at the moment is how to ensure companies are paying the optimal amount of tax,” It ends with the conclusion “There is no magic trick for collecting a lot more.” Worth a read, if only to understand why Labour’s manifesto costings are so difficult to achieve in practice.

  • Graham Evans 21st Jun '17 - 7:18pm

    Just to update my earlier comments. Next year the amount of dividend income which you can receive without paying additional tax will fall from £5,000 to £2,000. Also the capital gains tax rate for non-residential property gains is now (2016/17) 10% for standard rate tax payers and 20% for higher rate payers. https://www.gov.uk/government/publications/rates-and-allowances-capital-gains-tax/capital-gains-tax-rates-and-annual-tax-free-allowances

  • Laurence Cox 27th Jun '17 - 5:36pm

    Again defenders of the status quo, like @Graham Evans and @Peter Bancroft seek to obfuscate and mislead. The following figures are for 2016/17

    The rate of employee NI between the LEL and UEL is 12% not 10%, so an employee is paying an effective 32% while the company owner is paying only 26%. Over the £32k standard rate band, that 6p adds up to an extra £1920. But it is worse than that. By paying himself in dividends rather than salary, the company owner also gets the first £5k in dividends tax-free (so an extra £1000) on top of his £11k personal allowance. Furthermore, as he will be paying his tax through self-assessment he does not have to pay his taxes until the end of January following the end of the financial year, while the employee on PAYE is paying them from Week 1 of the financial year.

    The tax-free amount for dividends has not been reduced from £5000 to £2000. It was in the Finance Bill for 2017, but was not part of the Act. Whether it will be reintroduced in the autumn Finance Bill is doubtful as the Government no longer has a majority except with DUP support.

    Capital gains taxes on property are indeed 28% compared with 18% for other capital gains, but most people who are in buy-to-let are in it for the long haul, seeing it as their pension pot. In contrast there are many other collectables that people invest in including antiques, wine, classic cars, silver, coins, stamps etc. These are all taxed at the lower rate and are generally much more liquid investments than property (literally in the case of wine).

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