The longer the economy stagnates and the less money there is to go around, the shriller the demands for changes to the tax system. Indeed, with all the indicators pointing to more years of economic pain, and the Chancellor forced to admit that spending cuts will run on beyond a single Parliament, the debate is already hotting up.
Both sides of the political spectrum cling to the fallacy that a tweak to taxes here or there is a sure-fire way both to boost growth and fill the yawning state coffers. For those on the right, swingeing tax cuts would immediately release the commercial sector's pent-up animal spirits. For those on the left, it is significant tax rises that are needed: lift government revenues, slacken the austerity drive and – bingo – renewed economic dynamism will follow.
Unfortunately, both arguments are too simplistic to be useful. Not only are the sums involved simply too small to make a real dent in the vastness of the public finances. Both, in their different ways, ignore the "Laffer curve" relationship between taxation levels and the money flowing into the Exchequer. Set taxes too high, the oft-misquoted theory shows, and avoidance becomes so prevalent that the state's receipts go down: hence the (ill-explained) abolition of the 50p tax band. Set rates too low, however, and the Exchequer also suffers – a fact that escapes the raucous Tory right.
In fact, the issue is less the level of taxation than its complexity. While the political imperative is always to make changes – whether to address perceived injustices, to curry favour or simply to be seen to be "doing something" – every adjustment causes trouble elsewhere. Gordon Brown was the arch-tinkerer, of course, but he was far from alone. Thanks to decades of fiddling, Britain's tax code now runs to a heart-sinking 17,500-plus pages.
It is by this test that any new plans must be judged. The first priority must be to move to a system that is simpler, and thus both cheaper to administrate and trickier to game. The second must be to focus on economically unproductive wealth tied up in static assets, rather than on income or jobs. Amid the general hubbub, there are two good ideas on the table, and they are both from the Liberal Democrats.
First, the mansion tax. This newspaper has long made the case for a scheme targeting unearned wealth accrued from the arbitrarily rising property market. By creating an extra council tax band, the plan avoids adding to the complexity with a whole new levy. And this week's suggestion from Nick Clegg – that those whose housing wealth far outstrips their liquid assets could defer payment until after death – irons out one of last wrinkles. All that remains is to manage the logistics of working out which properties are affected.
Labour's sudden support for the proposal is an encouraging development. But where Ed Miliband would use the money raised to pay – in part – for a reintroduction of his predecessor's highly complicated and largely ineffective 10p tax band, an altogether better way to ease the burden on the least well-off is to take more of them out of tax altogether.
Progress has been made, it is true. The income-tax threshold is on course to rise to £10,000 by the end of this Parliament. But even that can only be the beginning. That those on the minimum wage should be taxed at all is an absurdity, even more so when some are both paying tax and receiving state benefits. Here, then, is the junior Coalition partner's second good idea: a 2015 manifesto pledge to raise the threshold to £12,500. Simple and progressive, the proposition merits unqualified support.
There are, then, tax changes that can justifiably be made. But they are no quick route to economic growth, whatever some might claim.Reuse content