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.