No one swallows this tax propaganda

Both parties have exceeded themselves in picking the data to serve their political agendas

Is tax an issue for you in this election? All the main political parities seem to think it is one of the central issues on which the result will turn. As a result, the air is thick with striking but mostly highly tendentious and misleading propaganda about what has happened to taxes during the term of the current Government - and which party will do more damage to your welfare if it is elected.

Who is right? And does it matter? My view has always tended to be that much of the propaganda about tax at election times is a waste of time, in the sense that most people know perfectly well from their own experience whether their tax payments - and the proportion of their income that they pay in tax - have or have not gone up. They also have a very shrewd idea of which party is more likely to hit them harder with taxation in the future.

So, for example, all the rhetoric which the Tories continue to expend on extolling their efforts to cut income tax rates is unlikely, surely, to fool anyone. Most voters know - because they have seen it with their own eyes - how sharp cuts in the rate of tax can quite easily sit alongside an increase in the overall burden of taxation. What is given back with lower tax rates can quite easily be taken away again in the form of higher VAT, increased national insurance contributions, or reduced allowances, and so on. That is exactly what has happened in the last five years.

Similarly, one assumes, not many people can really be taken in by the Labour Party's superficially attractive attempts to paint themselves as the party of new and fervent fiscal rectitude. Most people who will vote for Labour will do so with their eyes open, in the knowledge that they are voting for a party which in practice, and for all its fine words, is likely to end up spending proportionately more in real terms on public spending over time than the Tories.

It may well be what most people want. But, even if Labour sincerely wants to keep to Tory public spending targets, the odds must be that they will fail to manage it in practice - not least because the spending targets themselves are remarkably tight.

Having made this bold assertion that nobody - surely - is fooled by all the nonsense talked on tax, one does still wonder if it is right and not just because the main political parties clearly think it worth spending millions on pushing their unconvincing tax arguments.

As the Institute of Fiscal Studies points out in its admirable election briefing document this week, both the main political parties have exceeded themselves this time in picking data which best serves their own political agendas. Thus Labour tells us that the typical family has paid more than pounds 2,000 in extra taxes since 1992, while the Tories say that the average family is pounds 1,100 a year better off than at the time of the last election.

Both claims are right and wrong at the same time - largely because they are based on different assumptions. The Tories look at the overall net income of people, implicitly accepting the credit for the performance of the economy and earnings during their time in office.

Labour in turn naturally prefers to focus solely on the changes in taxation which the Government has made, especially in its two tax-raising Budgets of 1993 and 1994. It is easier to point the finger of broken promises at the Government if you choose to stick to taxes alone.

The truth as always lies somewhere in the middle. As the IFS shows, people on the whole are better off than they were five years ago because their incomes have continued to grow in real terms. But the absolute tax bill they face, and the overall share of taxation within the economy, has also risen over the last five years, though the precise amount depends on the starting date you use.

The percentage of gross domestic product taken up in taxation and national insurance contributions has risen from its low point of 33.75 per cent in 1993-94 to a planned 36.25 per cent in the financial year just ended.

On a strictly five-year view, the Tory record on taxation naturally does not look good. As my table shows, the Government deliberately raised taxes in its three middle years in office and cut them at either end, which just happens to be around election years. One reason it had to raise taxes, apart from the fallout from the European exchange rate mechanism debacle, was because it had engaged in a fatal combination of excessive tax cuts and large public spending increases just before the 1992 election.

It is probably no coincidence that the 1992 election looked to be pretty close, making some old-fashioned pre-election bribery seem a highly reasonable investment. This time around, with Mr Major well behind in the polls, the incentive for engaging in flagrant electoral bribery is paradoxically much more limited.

Of all the interesting data assembled by the IFS, electors in my view still need to hang on to one other home truth. It is that the overall level of taxation in the UK is still substantially below the average for the rest of Europe.

After years when it seemed to grow relentlessly, the proportion of economic activity accounted for by public spending has also been falling faster than in the rest of Europe, and is now (at 37 per cent) only marginally above the average for the OECD as a whole. Criticisms of the Tory record on taxes have therefore to recognise that the increases they have made started from a relatively low base.

The flip side of this is that voters know they can vote for higher taxes this time round without necessarily risking the dangerously high taxation levels of many other European countries.

As issues go, in other words, tax is not such a big deal in the overall scheme of things as it is made out to be. A pity that the same cannot automatically be said about the outlook for investors, who are faced, if Labour wins, not only with a windfall tax on the privatised utilities (now largely priced into the market), but also the threat of further restrictions on advance corporation tax credits, which as I said last week could have a serious dampening effect on the stock market.

Revenue effects of Budget changes this parliament

Tax changes (pounds million) 1992-93 1993-94 1994-95 1995-96 1996-97 Total

March 1992 Budget -2,170 -430 -2.600

March 1993 Budget 490 6,235 3,850 10,305

November 1993 Budget 1,675 333,220 1,180 6,075

November 1994 Budget -1,225 -120 -1,375

November 1995 -3,140 -3,140

Measures between Budgets 815 -385 505 -120 815

Excise duty adjustment 570 570

Total -2,170 875 7,525 6,050 -1,630 10,650

Total 1997-98 prices -2,563 992 8,291 6,456 -1,716 11,551

(pounds million)

Real tax increase per -117 45 377 298 -78 525

household (pounds ) Source: FSBRs

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