This article is from the February issue of Total Politics
In November, the Office for Budget Reponsibility put paid to the chancellor’s Plan A: clear the deficit with time to have a little splurge just before the next election. Britain will increase its borrowing until 2017, the independent forecasters say. George Osborne’s Plan B is not a change in the direction or speed of travel, as Ed Balls is demanding: it’s about changing the way the public thinks, and has been quietly running in the shadow of Plan A. From a nation that thinks in terms of spending, rather than saving.
The announcement of a new hospital or school getting built is still much easier for the public to visualise than the personal benefit that might come from the cancelling of an increase in the employer contribution towards national insurance or even the rise in the tax threshold.
Recent polls have put Labour in the lead over the Tories in popularity, but behind them when it comes to dealing with the economy. If the public can be convinced that dealing with the economy is the most important objective, the Tories could win the next election even without being the most popular party.
There is a three-pronged approach to the Tories’ tax plan, and it can be summed up in three words: transparency, business and poverty.
The first problem is that many taxes are well hidden. During 13 years as chancellor and prime minister, Gordon Brown was good at disguising taxes while highlighting spending, according to former banker and employee of the chancellor, Devizes MP Claire Perry.
“The last government was very good at hiding tax-rate increases through manipulative means,” she says. “One of the worst things we were going to inherit was putting up the employer contribution to national insurance – this tax on jobs – it is crazy.”
Brown was so good at it that it took the best part of a year before the public or media noticed that he had cut the 10p tax right before everyone’s eyes in his final budget as chancellor in 2007.
If people do not realise they’re paying tax, they do not resent paying it. Who knows how much tax they pay when they fill up their car or buy a pint of beer? Some people may know that fuel duty and VAT make up around half the cost of petrol, but how many are thinking of the income tax and NI they have already paid as well? Once these are included, a basic-rate taxpayer is paying £139 to fill a 60-litre Ford Mondeo with £30 worth of petrol – a top-rate taxpayer pays £197. A basic-rate taxpayer pays £5.24 for £2-worth of lager in a pub, while a top-rate taxpayer pays £7.43. Most people don’t think like this – “It’s too depressing” was one reason in a straw poll – but the Tories want them to. “Transparency is a lodestar of the government,” says the chancellor’s former chief-of-staff and economic adviser Matthew Hancock, who now sits on the public accounts committee.
The Office of Tax Simplification was set up in July 2010, just weeks after the coalition came into office. Its first major announcement in 2011 was that it wanted income tax and NI to merge, with the result that the basic rate would rise from 20 per cent to 32 per cent.
Conservative Party deputy chairman and member of the Treasury select committee Michael Fallon says: “We need to get people to think more about the taxes that they pay.
“The government’s looking hard now at the tax and NI systems so that the two can be calculated on the same basis. It will make it easier for businesses. It is a preliminary step to actually merging them. But what it does, of course, is help people realise that NI is a tax. It’s about making tax more transparent. And once tax is transparent, it’s possible for people to encourage their politicians to get it down.”
Perry wants to see a pie chart on people’s tax receipts, telling them where their taxes are being spent. “I want,” she says, “to see a greater link between taxes and spending. When you get your tax return, it should say: ‘Thank you very much for your taxes. You will be interested to know that for every £1 you pay in taxes, 30p is going on the NHS, 20p is going on defence…’ The more transparent you can make that link between taxes and spending, the more people understand that you cannot have something for nothing. We’re treating the British people like fools at the moment. The British tax code is the longest in the world. It’s a massive impediment to growth.”
Another large tax that we all pay is VAT. Again, it’s hidden. When we go to the supermarket and something says it costs £10, that’s what it costs at the till. In the US – a country where the centre ground sits to the right of Britain – it’s different. Everything is marked up ‘pre-tax’ so that shoppers are forced to have to think about the tax they pay on every item they buy. Only after their shopping is rung up in the till is the tax added, and the shopper then has to fish around in their pockets for the government’s take.
Perry spent 10 years in the US, first studying at Harvard University before working for the Bank of America. “I hadn’t heard the phrase ‘tax dollar’ before I went to business school in the States,” she says. “People have this personal identification with taxation and an instinctive antipathy towards it.”
Would Hancock like Britain to adopt the US style of calculating VAT at the till?
“I certainly wouldn’t be against that,” he says. “Showing people how much they’re spending on tax is all to the fore. People are very interested in that now.”
The coalition is counting on a massive rise in private sector jobs to make up for the 710,000 predicted public sector job cuts. It plans to do this by making Britain the “best place in Europe to start, finance and grow business”, according to George Osborne.
“Business taxes should be where we tackle first,” says Hancock. Corporation tax is being reduced from 28 per cent in 2010 to 24 per cent by the end of this Parliament. Fallon wants to see this go even further. “I’d like us to give Ireland a run for its money,” he said. Ireland slashed its corporation tax in 1998 from 32 per cent to 12.5 per cent, a move that has seen a number of British businesses move to Ireland.
Perry is an admirer of Ireland, despite its property-led collapse in 2010.
“The Irish economy, having gone through a 20 per cent reduction in GDP, is now starting to recover because of a very good corporate rate,” she explains.
“They have made a deliberate attempt to target corporations. They had a huge shock and dealt with it very well, and are starting to come out of it. They have a business-led recovery rather than a public spending-led recovery; if you have to borrow to fund it, it’s not sustainable.”
Perry is a believer in tax receipts increasing as rates go down. She adds: “There’s something about moving to a lower tax corporate environment, where the value of taxes goes down but the volume goes up hugely because you’ve stimulated growth.
“Is there a way to go even further on corporate tax reductions to reward companies for jobs and growth generation? Because we have to grow. Anything we can do to encourage people to put their money at risk and invest in the British economy is a good thing.”
The Tories are also very aware of how well the ‘nasty party’ image can stick, which is why so much energy is being channelled towards helping the lowest-paid workers through the tax system.
The key Liberal Democrat policy of raising the personal allowance to £10,000, which was adopted by the coalition, is one that chimes well with Tories. The government claims it will take 880,000 people out of income tax altogether, and around 23 million basic-rate taxpayers will gain by £170 per year on average. The tax threshold is rising each year, from £6,475 in 2010 to £8,105 next year.
“When it is affordable, I want to see the threshold increased past the £10,000 mark,” says Perry, “so that when fiscal conditions recover, you ratchet the lower thresholds up. That’s a very progressive way of delivering lower taxation to individuals.”
Fallon believes that the government needs to work harder to drive home the message that taxes are being cut even while the deficit is being paid down.
“What gets forgotten is that we’re cutting taxes – we’ve cut taxes for the lowest-paid, and we want to do more, and we’re cutting taxes for business.
“Corporation tax is being cut every year. Council tax has been frozen, which is, in fact, a tax cut,” he says. “The most important areas in which we’re easing the tax burden are for the low-paid and small businesses.”
Hancock agrees: “We need to make the case more strongly about raising the threshold at which people start paying tax. We are reducing the tax on the lowest-paid and the burden on people who do just a few hours’ work,” he says.
“There’s a difference between promising unfunded tax cuts and actually putting more money into people’s pockets.”
For those hoping to see the top rate of tax removed before the next election, Hancock says it is “crucial that it is temporary”, but Perry adds that it is “politically unpalatable” to cut it while the “public sector is on a pay freeze”.
Evidence suggests people are already starting to think harder about the taxes that they pay. While the party’s membership has declined since the general election, membership of the grassroots group The TaxPayers’ Alliance has shot up by 30 per cent, from around 50,000 to 65,000, helped, according to spokeswoman Emma Boon, by the coalition raising VAT to 20 per cent.
“It certainly helped focus people’s minds on the taxes that they pay,” she says.
With Europe showing up the divides within the party, low taxes are a uniting force for Tories.
“All Tories believe in a low tax economy,” Fallon stresses. It is yet to be seen if the public are with them.
John Higginson is political editor of Metro