Cameron’s ‘tax choice’ misses the point

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November 3, 2014 by Paul Goldsmith

In an interesting article in the Times last week, David Cameron set out his view of the ideological differences between the Conservatives and Labour on the subject of income tax. It contained some very interesting distinctions and explained well his view of income tax policy. As a piece of political posturing, it made sense. There was also some economic theory that made sense. But in his article Cameron commits two errors; he does not address how the tax cuts he is promising will be funded, particularly in view of the Tories commitment to cut the deficit, and he ignores once again the little he is doing to address the problem of low pay in our economy.

First, what Cameron said. He talks of the way tax cuts incentivise work and contrasts that with how benefits incentivise welfare. He also contrasts taxing people less to increase their living standards with taxing more then giving some money back through a complicated system of tax credits and benefits. He argues that the latter can often mean that if people work more, they would earn less, which is rather perverse.

Then he gets a bit more ideological. He points out that “every single pound of public money started as private earning. Every million in the Treasury represents a huge amount of hard work: early morning alarms, long commutes, hours spent on the factory floor, the office, the hospital ward or the classroom.” He then makes an interesting point about how Ed Miliband and his Shadow Cabinet spent years mocking the cut in the highest rate of incomes tax from 50% to 45% as the “government writing cheques” to those people. This characterises public money as something that a government “bestows magnanimously on the people”, and explains what Cameron calls the ‘appalling government profligacy’ he feels occurred on Labour’s watch.

Cameron goes on to say that it is easy for a government to talk about what they have spent money on (something Gordon Brown in particular liked to do), but governments also have a moral duty to think about those people who work hard on very little income and would desperately like to spend more on their family. He then links this to the 3 million people his government has taken out of income tax, and the 26 million people for whom income tax has been cut. He talks about how the personal income threshold (the level your income has to reach before you start paying tax) will rise to £12,500 and the higher rate tax threshold (the amount you have to earn before you pay the 40% higher rate of tax) will go above £50,000 in the next Parliament if the Conservatives are in government. He feels these cuts are his ‘moral duty’.

Which is where David Cameron and I depart. He has talked of his moral duty being to cut the deficit but then admits in the article that the tax cuts he is talking about are unfunded. The Coalition was going to get rid of the deficit in this Parliament, now they have delayed it to the next Parliament, but we are now in the situation where the deficit has actually INCREASED in this last month. The Institute of Fiscal Studies have already pointed this out in a response which came pretty close to calling his claims to be cutting the deficit a lie.

Most of the rises in tax thresholds he boasts about will be taken care of by inflation anyway, so they will make very little difference to the cost of living. These tax “cuts” are no more than an election bribe. Our deficit is still £100billion, which is the amount that is being added to the country’s national debt every year, yet Cameron is announcing tax cuts whilst protecting the NHS budget again, which leave him very little room to make cuts anywhere. Like his ridiculous posturing over the freedom of movement of EU workers, this is about the 2015 election. Nothing more.

Then, as Will Hutton points out in the Observer yesterday, there are the problems with the ideological basis of Cameron’s thoughts, particularly that “every penny of public money starts from private earning”. Hutton feels that Cameron has got it the wrong way around. The reason why it is possible for much private earning to take place is because public money has been spent on transporting people to work, on educating people to be ready for work, on keeping people healthy for work. Also, the government often gives grants for scientific and innovative research and development, so quite a bit of private earning happens because public money has been used to share the risks. Also, Hutton mentions that Cameron’s view of society as a collection of individuals making and spending money as they see fit forgets how interdependent we are as people. We pay taxes to protect ourselves and each other, making taxation the “most complete expression of our morality.”

Which leads me to my final point. Cameron’s raising of the personal income threshold and the amount at which the higher tax rate kicks in does little to help those people who are paid at a rate so low that they were already not paying income tax. These people, who COULD choose a life on benefits in which they may actually earn MORE, are taking jobs on tiny pay, sometimes on zero hour contracts. They are doing the ‘right thing’, as Cameron likes to say he rewards, but having to go to food banks to feed their families. When Cameron does something concrete about that, he can talk about morality and economics.

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6 thoughts on “Cameron’s ‘tax choice’ misses the point

  1. If the Tories get in again at the next election I will just have to sit back and admire the fantastic job the teachers at Eton did when Cameron and his Cabinet pals were there. It takes some serious intelligence and ingenuity to convince poor people to vote for public school educated aristocratic millionaires who are promising to cut taxes for rich people. The great political con that has been swallowed by the electorate since the days of Thatcher is that progressive income tax is somehow wrong or unfair (shifting much of the burden of revenue gathering onto indirect taxation such as VAT – where billionaires and people on the bread line pay the same percentage tax on their fuel bills for example). Meanwhile Labour have been too spineless to make the case for things that are considered quite normal in other advanced European countries with mixed economies such as Sweden, Germany, Switzerland and the Netherlands. All of these are essentially capitalist free market economies – but their richest 1% are less greedy than ours and do not gobble up such a staggering proportion of the country’s wealth. Unsurprisingly those countries are less unequal than the UK and more people feel the benefits.

    I mean the sheer chutzpah of blaming the financial and banking crises of the last few years on ‘big government’ and public sector spending! The way in which the Tories, UKIP, and the Republican Party/Tea Party have managed to control the accepted narrative on the economy – to use the crisis as a cover for their long term ideological goals (reducing the public sector etc.) – and in so doing allowing the richest 1% to grab even more of the pie for themselves – is a moral disgrace. How do they get away with it?

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    • What do you think of the German system whereby pupils are examined at 14 and sent down an academic or a technical path. The technical path meaning they qualify from school with a trade? This was supposed to have happened when the grammar school system was set up in the UK but didn’t happen hence such a divide between those that got into grammar schools and those that didn’t. In Germany there is more compulsion in that technical route, but it also means they have a similar gdp per head than us but a much lower gini coefficient (as in, their distribution of income is more equal

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  2. Michael Williams says:

    Cameron’s promises of tax cuts may indeed be unfundable and unwise given the current deficit. However he is able to risk his credibility concerning the economy simply because his opponent, Ed Miliband, has none. This is not necessarily a defence of the PM, but until Labour builds its own economic credibility, Cameron can risk some of his in the election run up

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    • That is true, and may be what loses Miliband the election if James Carville is right (“it’s the economy, stupid”). Labour can’t really build economic credibility again until they are back in government, which puts them in a catch 22 situation. I just hope that Cameron doesn’t abuse the leeway he has on the economy thanks to Labour’s woes on it to produce policies that are so full of political self-interest but so lacking in long term economic sense that we are paying for it for years to come.

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  3. Noah Caplin says:

    Whilst I agree that many of Cameron’s claims seem contradictory, it could be argued that the tax cuts he promises(and has delivered on) are more important due to the message that they send than the money itself. In an increasingly interconnected world(especially with the potential forthcoming TTIP), Britain needs to be seen as competitive in its taxation and support for businesses. After all, one of the reasons that London has grown a major financial centre in recent years is due to many of the highest earning people in France moving across the channel to avoid cripplingly high taxes(with at top rate of 75%). This boon for us has been a direct loss for the French economy and if we don’t ensure that we limit our own taxation, we could see similar losses to the US in the future. In this view, tax cuts aren’t a method of ‘going easy’ on the rich, but a way of ensuring that the UK remains an attractive destination to highly skilled, high value workers in the increasingly interconnected world.

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    • True – and I have no problem with the economics behind the tax cuts – although I would have liked to know what cuts in spending would follow them – which for political reasons he hasn’t mentioned. Well, actually he has, he is going to continue to cap benefits and welfare spending. He is going to continue to do nothing as 5 million Britons work for beneath the living wage. This is the dichotomy I struggle with.

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