Close tax loopholes before slashing public spending

Stewart Wallis is nef‘s Executive Director.

Letter to The Times, 26 May 2010.

Sir, While your leading article (“Cuts and the coalition”, May 25) hails the “restoration of the public finances” through the cuts announced on Monday, it is important to remember that this is not an expenditure crisis, it’s a revenue crisis caused by the behaviour of the banks. Failure to tackle the bank issue will inevitably lead to the same situation remerging all too soon.

Government should, as a first step, look to rein in the money it is already owed. In November last year the Treasury Select Committee reported that HM Revenue and Customs was sitting on £28 billion of unpaid tax bills that had been agreed but not settled. A further £25 billion could be sourced by plugging tax loopholes that the Government considers contravene the spirit of the law.

Stewart Wallis
Executive Director, New Economics Foundation

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Taxed by the tax debate

Josh Ryan-Collins is a researcher in the Business, Finance and Economics team at nef.

And yet another group of big business chief executives have signed up to the Conservatives’ policy to reverse Labour’s proposed 1% increase in National Insurance. Should anyone really be surprised that businesses would rather not have to contribute to reducing the public deficit? No, the interesting thing about this media furore is how few alternative suggestions are being promoted by any of the major parties in the run up to the election. The tax debate remains stuck in the ‘old economics’.

Critics of Labour’s policy are right that it is a tax on labour or ‘jobs’. But what is less clear is that government ‘efficiency savings’ are not equally a tax on jobs in the public sector. Anyone who thinks public agencies can achieve the kind of cuts the Conservatives are proposing without major redundancies is living in cloud cuckoo land. And given there are proportionately many more jobs in the public sector in the poorer areas of the UK one could also argue that cutting public sector budgets is more regressive than taxing business.

But it doesn’t have to be a zero-sum game. The ‘new economics’ is about replacing taxes on what we do want – productive jobs, investment in high quality public services – with taxes on what we don’t want.

And everyone’s pretty clear on what we don’t want. We don’t want fossil-fuel intensive production or transport. We don’t want another housing boom. We don’t want massive windfall profits for energy suppliers because its been a cold winter. We don’t want huge bonuses for bankers who have made speculative short-term profits by playing with our pensions or retail deposits.

If we tax these areas we not only raise revenue to meet the budget deficit, but we also steer our economy in the right direction and provide incentives for more productive investment. A land value tax, for example, would act as automatic brake on speculative booms in the housing market and might encourage us to invest our savings in industry rather than non-productive property. A carbon tax or rationing system would incentivise investment in renewable energy schemes and encourage more sustainable consumption. A financial transaction tax (FTT) would slow down and shrink the ‘socially useless’ finance sector.

Plus, these schemes would also be progressive, a land tax stopping the widening wealth gap between home owners and tenants, a carbon tax redistributing from rich to poor in most cases (as demonstrated in the recent report by the Green Fiscal Commission) and an FTT would bring city pay back down to earth.

This is not rocket science. And its not simply a call for more ‘green taxes’, although even that seems to have dropped off the political radar. It’s a call for a taxation system that promotes ‘economic goods’ and punishes ‘economic bads’. A new economics of tax can be win-win for the economy, society and the environment as well as improving the public finances. Lets hope the party (or parties) that come in to power in May feel able to turn over a new leaf in the tax debate.

Cut the bad habits

Rupert Crilly is a researcher in Environmental Economics at nef

Photo by wools via Flickr

We used to get along well with oil, in a lonely sort of way. It has played a major role in the advancement of much of our civilisation, providing energy and materials. But now our progress does not have to depend on it. Emerging from the recession provides the ideal time to redirect our progress.

Black Gold
Over 4000 years ago we used asphalt, present in most crude petroleums, as a fairly benign glue to build the walls of Babylon. And the industrial revolution was a bright spark in the history of human innovation: our technological advances have revolutionised how, where- and even when- we live. It wasn’t long before Thomas Midgley, Jr. developed both leaded gasoline and CFCs, certainly in the top five recent environmental disasters. We learned to use oil to provide energy, fuelling our cars, and help in the creating of plastics, pesticides, fertilisers and solvents. But, despite our addiction, we now need to use the alternatives.

Taxing the Bad
This month the Office of National Statistics posted employment figures (the lowest in over ten years; see below) and an estimate that the UK has, behind the other G7 countries, emerged from the recession with growth of 0.1%.

The graph above, from the Office of National Statistics, shows the employment rate for September to November 2009 was 72.4%, the “lowest since winter 1996-97 and is down 0.1 on the quarter”. Average regular pay (excluding bonuses) was up 1.1% over the same period to £424/week. This was the lowest annual growth rate since records began in 2001.

The 0.1% growth of the economy has been used for two opposite viewpoints on fiscal policy: that the government should cut our budgetary deficit by slimming our net spending, and that our spending levels should be maintained in order to secure the economy’s recovery. Neither addresses our addiction to oil and fossil fuel-based consumerism. Fiscal stimulus should be ploughed into building clean and renewable energy sources, creating ‘green’ jobs and preserving our natural environment. As many have advocated, including the economist Paul Krugman, the tax system would be an effective way to transition our economy to a cleaner future that would actually help the economy and the environment. Tax the ‘bads’ (fossil fuels, aviation, environmental degradation) and nurture the ‘goods’ (employment tax credits, subsidise renewable energy).

In times of darkness and uncertainty we should turn to someone who knows better. So, I close with some help from the Tick: “Everybody was a baby once, Arthur. Oh, sure, maybe not today, or even yesterday. But once. Babies, chum: tiny, dimpled, fleshy mirrors of our us-ness, that we parents hurl into the future, like leathery footballs of hope. And you’ve got to get a good spiral on that baby, or evil will make an interception.”

It’s time for Labour to rediscover its redistributionist roots

Josh Ryan-Collins works on sustainable procurement and commissioning at nef.

These are truly astonishing political times. A Conservative Shadow Chancellor is criticising a Labour Prime Minister for planning enormous working and middle-class tax cuts. Meanwhile, the combination of tax cuts with a big expansion in borrowing threatens a currency crisis, with sterling already having fallen by a quarter against the dollar in the last three months.

The UK’s many creditors, mainly Asian investors who have lent with confidence to our high rolling banks, are starting to get itchy feet. UK debt is now priced considerably higher than German debt and there is a real danger of currency speculation leading to a ‘rout’ of the pound as Will Hutton suggested in the Observer yesterday. Brown and Darling are rumoured to be at loggerheads over how big the cuts and borrowing package will be, with the Chancellor taking over the role of Prudence against a bullish Prime Minister.

Perhaps unsurprisingly, it is the Liberal Democrats who seem to be offering a more sensible solution to the current problem. They are also offering tax cuts to ‘working people’, 4p off the basic rate of income tax, but funding it through taxes on the very rich and green taxes, hence keeping the public debt, and hopefully currency speculation, in check.

The question is why on earth Labour is not making similar arguments. If there was ever an opportunity to make a robust economic case for a progressive, re-distributionary tax policy, this it. Labour has, of course, been redistributing “by stealth” since they came to power but have singularly failed to build a moral and political case for redistributive policies, a failure many on the Left have attributed to a deference to the City.

Well, any deference to the Masters of the Universe has now disintegrated and it’s time the government got serious about tax. Not least because of the well-documented development, under their stewardship, of a new cadre of ‘super rich’ who increasingly have nothing at all in common with the middle classes.

nef‘s Happy Planet Index showed a strong link between well-being and economic equality. Put simply, well-being is relative, so that countries with more polarised income and wealth distributions have lower well-being than those with more even distributions, even if they have higher average earnings.

So raising income tax for the highest earners and perhaps also examining a wealth and land tax (not to mention an even more politically palatable windfall tax on energy companies), combined with green taxes, could satisfy both uncertain creditors and voters. Gordon Brown has shown no reticence in abandoning his golden rules on fiscal policy in recent days; if he wants to save his reputation for prudence, it might be time to take an equally aggressive approach to progressive taxation.

When it is about the economy but not economics

Eilís Lawlor is the acting head of the Valuing What Matters team at nef

Amid the economic gloom, it is taken as a given that the state of the economy will surpass all other priorities at the ballot box. But as the American election demonstrates, the relationship between a person’s economic position and their voting preferences is not nearly that straightforward.

The principle of representation is at the heart of the type of democracy which we in the UK share with the United States. In theory, it’s meant to prevent elites from acquiring and maintaining power: it ensures that the legislature mirrors the nation’s constituents.

In practice, however, it doesn’t always work that way. It’s not unusual for people to vote for candidates who are quite unlike themselves, but who they think will represent their interests. I doubt that many people who elect the current Conservative Party front bench would aspire to join their clubs or their social circle. At other times, we vote – in good faith – for candidates who subsequently let us down. When small shopkeepers voted for Margaret Thatcher in their droves, they probably didn’t expect her to unleash a wave of deregulation that would culminate in one of the most concentrated business sectors in the world.

But nowhere has the link between class and voting preferences been as successfully eroded as in the US. The unholy alliance between economic neoliberals and social conservatives means that people will regularly vote against their own material interests for cultural, religious and patriotic reasons. So while 63% of voters said that the economy was their top concern this did not necessarily translate into a vote for the person, or party most likely to represent their economic interests.

Democracy is problematic for elites when 60% of the electorate earn less than $70,000. It’s not that the relationship between income and voter preference is inverse, the very rich also veer towards the Republican Party. It was only amongst minorities – where race played a greater role – that this asymmetry was turned on its head

The Republican base of poor white Southerners stayed loyal to a party that has cut taxes for the rich and eroded their healthcare and benefits and shunned Obama’s more progressive tax plan.

As well as capturing the language of human dignity and freedom, the right claim a monopoly on morality and national pride however narrowly defined. Hence, guns, God and abortion trumped jobs, insurance and a mortgage even during a month in which another quarter of a million swelled the ranks of the unemployed. This is fiendishly clever because it undermines the saleability of a more equitable system to the very people it should benefit thereby shifting the goalposts further rightward. Whether Obama’s consensus approach can reach those that reject their own economic representation remains to be seen.