Leading Article: Who will pay for tax cuts?

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The Independent Online
In an age when supermarket chains, newspapers and banks all compete frenetically on price cuts, we should probably not be surprised that the main political parties have joined in. And just as the commercial price cuts become ever more complex and confusing - are the two packets of washing powder for the price of one in Tesco better value than the three yoghurts for the price of two in Sainsbury's? - so do the tax cuts on offer from the political parties. Anybody who pays income tax would theoretically benefit from Labour's new 15p or 10p tax band. But what will Labour do to tax allowances or to higher-rate tax? We know there has to be a catch somewhere because there always is. The trick is to read between the lines, to tease out the nuances, to work out not what has been said but what has been left unsaid. Getting the right answer (to the question "under which party will I be better off?", which is the only one we are invited to consider) requires the combined skills of a mathematician, an astrologer, a linguistic analyst and a lie detector.

This is a game that Labour plays at its peril. The Tories rescued themselves from what seemed certain defeat in 1992 by telling porkies about tax. They can afford to tell even bigger porkies this time on the grounds, first, that they are likely to lose and so will not face the consequences, and, second, that the voters already think they are liars anyway. If Labour joins the auction, it risks leaving itself with quite unsustainable commitments. Government debts exceed assets by pounds 152bn and Labour may face a budget deficit equivalent to more than 5 per cent of national income by the end of the century. Far from cutting taxes, a Labour government may need to raise the standard rate by as much as 7p in the pound to get the deficit under control. Or is it really prepared to follow Bill Clinton's example and find the money by cutting welfare to the bone? The truth is that Britain has been living in a fool's paradise on tax, just as America did under Ronald Reagan. Privatisation proceeds, oil revenues, savings from civil service cuts - all these have been used to help finance tax cuts while also paying for unprecedented levels of unemployment. But these are all one-off benefits which cannot be repeated, and Labour's windfall tax on the utilities is just another example. Getting the private sector to build schools and hospitals is worse: the charge on the Exchequer is simply delayed for another generation.

Only one question is worth putting to our political leaders because, barring unlikely economic miracles, they will all have to answer it sooner or later. It is not "how much can you cut my taxes?" but "who will pay?" We already have some idea of the Tory answer. For the past 17 years, the Tories have manipulated the tax system to help the well-off at the expense of the poor. Higher and standard rates of income tax have been cut and a ceiling placed on national insurance payments; a whole series of schemes (Tessas, PEPs and so on) relieve tax on savings and investment income. The burden has been shifted to VAT, which hits the poor harder. Kenneth Clarke has said that, "in principle it is right to move ... from direct to indirect taxation" because reducing taxes on what people earn "has an incentive effect". What he will not say is how his party would raise further indirect tax. By increasing VAT to 20 per cent? Or by widening its scope to include food and children's clothes, thereby hitting the poor even harder? It is precisely because they don't want to face these questions that so many in his party are prepared to countenance dismantling the welfare state.

But Labour? Here, we have not the faintest idea. We know that Gordon Brown, quite rightly, favours a lower starting rate of income tax. The Tories have long waxed eloquent on the disincentive effects of high marginal tax rates (80 per cent upwards) in the 1970s. They are strangely blind to the continuing disincentives for poor people (mainly married wage-earners with children) who can lose 97 per cent of a pay rise, even as much as 120 per cent, through the combined effects of paying income tax and losing benefit. But how would Labour pay? If they will not raise the standard or higher tax rates, do Messrs Blair and Brown endorse the Chancellor's views on the future of taxation? Or the Tory right's views on the future of the welfare state? They should come clean.

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