Wednesday, 24 November 2010

An important debate avoided

For the sake of argument, let's accept the ONS figure for the 2009/10 deficit:
In the financial year 2009/10 the UK recorded general government net borrowing of £159.8 billion
That is, the government kicked a £160bn can down the road, for future generations to pay.

What if this option had not been on the table? What if, instead, the public had faced an honest choice between tax rises and spending cuts?

The deficit could have been eliminated purely by tax rises. Consider this government analysis:

Estimated direct effects of illustrative tax increases in 2011/12:

Income tax:

  • 1p on basic rate: £4.75bn
  • 1p on higher rate: £0.78bn

National Insurance:

  • 1% pt on main employees rate: £3.6bn
  • 1% pt on employers rate: £4.3bn


  • 1% pt on standard rate: £4.75bn

Corporation tax:

  • 1% pt on main rate: £0.75bn

HM Revenue & Customs

By way of comparison, increasing the rates of duty on alcohol, tobacco and road fuel by one percentage point would raise only £0.36bn in total.

So to eliminate a shortfall of £160 billion, we could raise
  • basic rate income tax by 34p on the pound (from 20p to 54p); or
  • basic rate income tax by 17p (to 37p), and VAT by 17% (to 34.5%); or
  • higher rate income tax by 53p (from 4op to 93p), and basic rate by 25p (to 45p)
  • etc ...
Okay, so it's not actually that simple. Increased tax rates have dynamic effects (increased tax avoidance, decreased economic activity) which can actually decrease total tax revenue. If the government were to confiscate nearly 100% of income over £44k, very few people would push themselves past that barrier. If VAT goes up, people will buy less from shops, and more from the black market. A committed socialist would have to focus on taxes that are difficult to avoid, like property tax.

But the point remains: why not force governments to spend according to what they take? To bribe people with their own money, rather than their grandchildren's.

If the socialists are right, and people want high tax rates and generous benefits, they will get elected. Laffer-curve conservatives can make the counterargument that tax revenues could be increased by simplifying taxes and lowering rates. Libertarians can argue that the important goal is to roll back the state — to reduce reduce tax revenues, and leave more money in the hands of the private sector.

Government borrowing avoids this debate. Why do we allow it to continue?

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