30 November 2009

In place of cuts - making taxation fairer

My latest foray into the world of politics was another Compass briefing, this time on their recently launched policy paper on taxation that responds to the almost unanimous call to slash cuts with an alternative approach. Hence the title, In place of cuts.

The meeting was held at the Houses of Parliament which is still not familiar enough to be mundane. It amuses me that the security is less there than at the BBC; both x-ray bags but the BBC always find my penknife whereas Parliament never does. After security comes the still impressive St Stephen's Hall then the long walk along grand corridors to the committee rooms with their narrow leather-bound seats.

Professor George Irvin, the main author of the report, introduced the report with three simple slides that analysed the problem and recommended a set of measures that would both increase tax income and make the overall tax system more progressive (the richer you are the more you pay).

This chart clearly shows the problem; the poorest people pay proportionally most tax and while the middle incomes pay progressively more tax this drops off at the high end.

The solutions proposed In place of cuts include a fair degree of tinkering with the tax system to smooth the curve out. I support some of the proposals, such as removing the the upper limit on National Insurance Contributions, but I think the overall problem cannot be fixed by playing around with income tax measures.

This graph tells me that taxation works well for, but only for, the middle income group (on, say, £10k to £80k) and that income tax is not the way to address the anomalies at either end.

One reason why this is the case is that any changes to taxation impact the middle income band as well as the band that you are trying to target.

The other reason is political. Nobody ever voted for tax increases even if they were for rich people only and tax cuts are soon forgotten.

Apart from correcting a few of the current anomalies I would prefer to help the lower end through benefits and schemes like Sure Start (i.e. giving them some things for free) and to tax the high end through, for example, capital and property taxes.

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