Leading Article: A 300-year-old tax lesson

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The Independent Online
JEAN BAPTISTE COLBERT, chief minister of Louis XIV, declared: 'The art of taxation consists of plucking the goose so as to get the most feathers with the least hissing.' The continuing validity of Colbert's nostrum was recently demonstrated in Britain by the fate of the poll tax, but in this year's Budget it takes on a further dimension. If Norman Lamont is to extract more feathers, he will not only have to do so without provoking too angry a response, he will also have to take into account the uncertain health of the bird. An economy just recovering from a long recession needs to be handled gently.

Yet there is the smell of higher taxation in the air. This weekend the Chancellor and his advisers have started the serious discussion over the Budget at Chevening, the grace-and- favour country house where traditionally each year the Budget process begins. But the fact that the decision-making has hardly begun has not stopped a flurry of stories about possible tax plans, in particular an extension of the VAT net.

The reason is plain enough: the budget deficit this fiscal year will approach pounds 40bn, which compares with a (pre-election) budget forecast of pounds 28bn. Next year, the fiscal year that starts in April, the deficit would approach pounds 50bn were no action taken. This would be equivalent to 7 per cent of gross domestic product, far larger than the United States or Germany. There would be grave risks in allowing such a deficit to grow unchecked; the longer corrective action is delayed the greater those risks.

But, equally, there are serious risks in trying to cut the deficit at a time when the economy is in the earliest stages of recovery. It would be extremely difficult to reduce public spending in the short term, and to raise tax rates significantly this April would surely reverse the slow and painful recovery in confidence that seems now to be taking place. Besides, no one knows the extent to which the fiscal deficit is cyclical - and so will correct itself as the economy recovers - and the extent to which it is structural. A small structural deficit, perhaps 1 per cent of GDP, is quite normal for an industrial country.

Yet something has to be done and there are strong political reasons for taking action early in the electoral cycle. There is, fortunately, a way forward. It is to put in place a broadening of the taxation base, without at this stage greatly increasing the tax burden. This will mean oft-mooted changes to VAT.

Britain's system of VAT is unusual in two respects. It is charged on a narrow range of goods and services - only half of the things most people buy - and it is levied at a single rate. The more the net is widened, the lower the rates that can be charged. There is a case for charging some items that at present escape VAT at a very low rate. If, in the future, it becomes clear that further revenue is needed, the rates could be raised.

Colbert's principle should be the Chancellor's guide. There are areas, such as the environment, where taxation can be used positively to improve the quality of life of the country. For example, petrol tax will in any case be increased to offset the loss of revenue from the ending of the car tax. There is a strong environmental argument for increasing it further to bring British prices to the EC average. The plucked motorists would hiss, but society as a whole might well applaud.

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