The political parties don't want to talk about tax... and neither do we

As the population ages, taxes should rise or services must be cut. But politics and business are in denial

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The Independent Online

“Yesterday, upon the stair, I met a man who wasn’t there. He wasn’t there again today, I wish, I wish he’d go away.” In this election campaign, taxation has become a bit like the man who wasn’t there: it seems to be constantly at the centre of the debate, and yet, at the same time, it isn’t really there at all.

The major parties trade scare stories about tax rises after the election. Labour says the Tories would hike VAT after polling day. The Conservative party says Ed Miliband would extort £3,000 in tax from working households in the next Parliament. Both sides deny any such intention. The Liberal Democrats are at least up front about their intention to increase taxes in order to balance the books on their chosen timetable. But they are coy about which ones would go up.

The parties’ manifestos are due out this week. Perhaps we will soon find out more about their tax plans. But don’t hold your breath. The Institute for Fiscal Studies has noted that taxes historically have a habit of going up immediately after elections, when their vote-repelling qualities are less relevant. Yet some insist that Britain is already at the limits of its taxable capacity. The refrain from the low-tax lobby groups is that history shows total tax receipts equivalent to around 36 per cent of GDP is the limit of what this country will tolerate.

But history probably isn’t a good guide. The proportion of national income that we spend on pensions and health has been steadily rising in recent years because of our ageing population. Thirty-five years ago we spent 4.9 per cent of GDP on pensioner benefits. This year it will be 6.2 per cent. NHS spending as a share of national income has risen from around 5 per cent in 1980 to around 8 per cent today. That pressure is one of the reasons why, despite deep cuts to many public services in recent years, we still have a sizeable deficit to clear. The juggernaut of age-related public spending has motored on right through the years of austerity. And it will continue to do so as longevity increases.

We need to address how we deal with these demographic spending pressures while also balancing the national books. Crushing public spending in other areas, such as the police and defence, down to negligible levels is one option. A permanently higher tax take as a share of national income is another. Which do voters prefer? None of the parties wants to engage in this serious debate.

Tax also “isn’t there” in the campaign because none of the main parties – for all their chest-beating over mansion taxes, the personal allowance and the higher-rate income-tax threshold etc – are prepared to seriously overhaul the structure of the tax system.

What would a sensible programme of tax reform look like? Not Labour’s mansion tax, but a progressive tax on housing consumption (based on up-to-date home valuations) to replace council tax and stamp duty. Instead of yet another hike in the tax-free personal allowance, national insurance on the low-paid should be scrapped. Even better, roll the archaic levy into income tax entirely.

Inheritance tax? Abolish the loophole-riddled farce, which barely anyone pays, and replace it with a tax on all gifts received by an individual over a lifetime. It’s baffling, given their professed concern about wealth inequality, why Labour and the Liberal Democrats are not advocating such an obvious egalitarian reform. Labour plans to raise corporation tax to fund a reduction in business rates for small firms. But it should be thinking much bigger: replace the rates with a commercial land value tax, which would encourage the efficient use of sites.

Tax matters. It should be a central theme of this election campaign. Politicians should be encouraging voters to face up to the role of tax in meeting the upward shift in demand for spending on the elderly. There is also massive scope to simplify tax, improve economic incentives and redistribute income in a way that enhances national productivity. Instead, the parties squabble and hyperventilate over trivia.

In fairness, business leaders are as bad. They write self-important letters to papers over Labour’s proposed marginal increase in corporation tax. But the corporate titans make not a peep about the damaging distortions created by the longstanding tax privilege granted to firms that fund their operations with debt rather than shareholder equity. The public is no better. Polls often show simultaneous demand for higher public spending and lower taxes. Maybe we get the election tax debate we deserve. But, however much we might wish that tax – and the tough trade-offs it entails – would go away, we really should stop on the stair and address it properly.

Hamish McRae is away