None of the parties have spelled out how they would cut the deficit. Since their various proposals will scarcely dent it, whoever wins the election will have to implement further tax rises and spending cuts.
Is raising NICs a good first step, though? Hardly. With unemployment high and incomes squeezed, it is staggering that Labour wants to raise taxes on labour. Hitting ordinary voters’ main source of income is hardly progressive. Worse, it will harm the recovery by raising the cost of labour and penalising effort. That will crimp pay, cost jobs and discourage working – limiting the tax take and raising benefit spending.
NICs and income tax inflate the cost of employing the average worker by half, according to the OECD, while a single person on two-thirds of average wages faces a marginal tax rate of more than 40 per cent. Hiking taxes on hard work is perverse.
While the Conservatives are right to oppose a “tax on jobs”, Labour and the Lib Dems are right to question George Osborne’s scarcely credible claim that nebulous “efficiency savings” will cover the revenue shortfall. But that does not make rescinding the NIC rise “unaffordable”. It just means the parties need to find better ways to raise extra revenue. Here are three.
First, tax harmful things, such as carbon emissions. A levy of little more than £10 a tonne could fill the £5.6bn gap left by the Tories’ rescinding of Labour’s 1 per cent NIC rise. Raising the rate as emissions fell would ensure a steady stream of revenue. It would also stimulate clean-tech industries and the green jobs of the future, without picking winners.
Second, bring forward reforms to encourage people to retire later. As the first baby boomers reach 65 this year, they should bear some of the burden of adjustment, while working longer would also replenish savings crushed by the crisis. Raising the retirement age by three months a year for the next 20 years and removing incentives for early retirement and obstacles to working longer would reduce pension outlays, raise tax revenues and boost growth.
Third, introduce a tax on land values. Whereas taxing work is wasteful – less is produced and no tax is raised on the lost output – land is in fixed supply so a tax on it is less harmful (and impossible to avoid). Shifting the tax burden from labour to land would therefore boost economic growth, according to an OECD study.
Taxing land values could also limit property bubbles, which divert funds from productive investment in booms and then cause terrible busts – without discouraging development (unlike property taxes), mobility (unlike stamp duty) or investment (unlike interest rate rises).
It would also be fair. Whatever the merits of capitalism, there is nothing intrinsically desirable about the initial distribution of property rights. Britain’s history is such that land is distributed more unequally than in Brazil. There, 1 per cent of the population owns 49 per cent of the land; here, 0.3 per cent owns 69 per cent.
Land appreciates not through landowners’ striving, but that of others. As talented and industrious people have flocked to London, the value of the 300 acres of fields – now Mayfair and Belgravia – passed down to successive Dukes of Westminster over three centuries, has sky-rocketed to an estimated £6.5bn. Better, surely, to tax that windfall rather than the work of those who generated it? A land tax would also pay for much-needed infrastructure investments that raise surrounding land values.
Replenishing Britain’s public finances will involve painful choices. But it is also a chance to make tax fairer and less harmful to growth. Wise politicians should seize it.
The author is a visiting fellow at the London School of Economics’ European Institute. His new book, ‘Aftershock: Reshaping the World Economy After the Crisis’, is out on May 6
Philippe Legrain: Tax land or carbon emissions, but not hard work
Monday, 12 April 2010-
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With Britain’s £167bn ($257bn) budget deficit looming, tax is becoming a key election battleground. Businesspeople are rallying to the Conservatives after they pledged to cancel most of the government’s planned rise in national insurance contributions (NICs). Labour blasts that the Tories’ unfunded “tax cut” will have to be paid for through an “unfair” rise in VAT. Liberal Democrats concede that raising NICs would be damaging, but argue that a “credible” prospective government could not afford to reverse it. Are any of them right – or might there be better ways of raising revenue?
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Comment Link
Wednesday, 14 April 2010 19:48
posted by chefdave
We shouldn't tax CO2 emissions, they're a byproduct of industrial activity and so taxing CO2 would effectively be a tax on work, something that we should be avoiding.
I agree with you about the land tax stuff though. -
Comment Link
Tuesday, 20 April 2010 08:58
posted by Niels
chefdave, the capacity of the earth to process pollution is also a limited natural resource (therefore it is theoretically included in 'land' in the classical economists definition). Yes, reducing C02 emissions would decrease the supply of polluting products and therefore increase the prices of these products. But you should look at it this way: these products have now a price that is too low because they are being oversupplied, as the boundaries of the earths capacity to process pollution are being overcrossed and the earths resources being overused. This inflicts an externalised cost on to future generations.
As we limit pollution to its appropiate levels, prices of polluting products rise, and a new form of economic rent comes to existance that should be collected by government. Indeed, this is another limited resource of which every citizen should get an equal share. Those would pollute more than their fair share are then paying for the privilege to those who pollute less than their fair share.
Yes, this would reduce jobs in the polluting industry. However, when the revenue of pollution taxes is used to reduce taxes on work and trade, we reduce prices of green products simultanuously. As a consequence, behaviour of consumers and investors changes in favor of green productivity, creating work in a greener industry. All this without subsidies from the government. -
Comment Link
Thursday, 22 April 2010 16:52
posted by chefdave
Sorry Niels but I disagree.
If natural activity began in marketplace for the trade in air then I would concede that you have a point. Unfortunately this is not the case. Any taxes on CO2 are therfore arbitrary taxes based on the notion that carbon and oxygen molecules are somehow 'bad' for the environment. Proving this is impossible so instead we have to rely on the assertions of green activists as well as the opinions of left leaning and unaccountable bureaucrats within the EU.
As the production of CO2 is intimately tied in with the production process itself taxing it would have the same impact as VAT, people would become poorer, jobs would be lost and our economy would again slow down at a time when we're hampered enough as it is with regulation and taxes.
The human cost of a tax on CO2 would be stark, whereas the environemtnal benefits would be negligeable if any were to materialise at all.
I prioritise the needs of people of that of the needs of the earth. -
Comment Link
Friday, 23 April 2010 04:07
posted by
Amy
We shouldn't tax CO2 emissions, they're a byproduct of industrial activity and so taxing CO2 would effectively be a tax on work, something that we should be avoiding.
I agree with you about the land tax stuff though. -
Comment Link
Saturday, 24 April 2010 07:47
posted by
Niels
It is very strange to say "I prioritise the needs of the people of that of the needs of the earth". As if these things are two distinct needs. The earth is the source of all our wealth, we live on the earth, of the earth. The way one threats the earth is always going to backfire somehow to people. You cannot separate the human being of his environment. In fact: this separation, institutionalised by the privatisation of natural resources, is the cause of all our problems.
I guess where we differ is that you do not believe in the damaging effects of pollution. With such a fundamentally different premise, we will of course not agree, even though we have similar views on economic theory. Even if we do not believe in global warming, the effects of pollution on the general health of the human species is devastating. This is even a bigger concern of mine than global warming. The air we breathe, the water we need to drink, the soil we get our food from are all poisoned. Not to mention the global disaster that our immoral meat industry is leading us to.
I agree that taxes on consumption is a bad idea. Taxing the use of natural resources like the limited capacity of the earth to process pollution is different from VAT in the sense that it only bears heavily on very specific forms of production, not on all production like VAT.
It would encourage different forms of work, that can make us all wealthier and more independent individuals. For example, green energy has the quality that it is more local and decentralized, making room for more smaller competitors and thus more free market, and less monopoly.
I also want to point out that more work does not necessarily mean that we are wealthier. It is absurd to believe that with modern technology there should still be full time jobs for everyone. Creating jobs that add little value to our wealth is pointless. At a certain point, an individual must be able to decide that having more time is more valuable to him than having more stuff. That is in essence also a free market principle, in my view. Then we come back to the topic of LVT, because the benefits of automation go mainly to land values, and we need to tax these to give everyone his share of the technological advances of society as a whole.
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