As I see it, there should be three simple principles underpinning George Osborne’s Budget tomorrow. Let’s take them one by one:
1) Variations in household wealth mean that policies aimed at affecting the wider economy will often have unpredictable political effects. Economists have a tendency to imply that changes in GDP affect everyone uniformly, but this isn’t the case. What’s more, journalists are quick to highlight extreme case studies that make good stories, but they can misrepresent the actual picture. Policy will do a lot to influence the economic climate, but the local economic weather will be more relevant to taxpayers. At the same time, the recovery can’t be managed through Whitehall. Take Enterprise Zones — they may be a means to try and boost growth in particular areas, but they are no substitute for organic and spontaneous growth.
2) Tax transparency is essential. Merging Income Tax and National Insurance Contributions would be an important means to reveal the tax burdens that currently exist, but a lot more can be done to show families and businesses exactly what they hand over the Treasury. Simplifying taxation and replacing hidden and confusing charges is an important step. According to the Association of Chartered Certified Accountants, 81 per cent of the public don’t understand the impact of indirect taxation. Businesses routinely complain that complexity is a bigger source of frustration than the actual levels of taxes themselves, and stealth taxes need to be made visible. Direct taxes should be clear and plain; I’d wager that if Britons saw just one number on their pay slip showing the real amount of tax they pay, then support for a lower tax economy would swell overnight. Even more so if taxpayers had to sign a cheque for their tax bill themselves.
3) We need to abandon the war on wealth creation. A top marginal rate of 52 per cent is a political gimmick that is economically destructive. People should pay taxes in proportion to the revenue they enjoy; but the richest 10 per cent in the UK have a tax burden that is 20 per cent higher than their share of market income. The true damage of punitive rates is not just the wealth that is lost due to people relocating (although this is unsettling), but the wealth that never gets created. Now, more than ever, we need entrepreneurs to to invest and employ.
With the removal of barriers to growth the Chancellor can help. But his main role is balancing the books and letting the private sector run the economy. He needs to stop gimmicks that hurt the economy and start the vital work of long term tax reform.
Anthony J. Evans is Associate Professor of Economics at ESCP Europe Business School and a Commissioner on the 2020 Tax Commission, a joint project from the TaxPayers’ Alliance and the Institute of Directors.
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