Tax

The Wisdom of George

Steve Richards of The Independent tweets that we should not be surprised if George Osborne performs a u-turn over the controversial Child Benefit cut for high earners announced at the Tory Party Conference this week. The point Richards makes is that, while in Opposition, Cameron and Osborne quite frequently ‘flip-flopped’, to use the dreadful American parlance, at the first sign of serious media scrutiny of policy. “They are weak” he writes and, for all the tough rhetoric on tackling the deficit, there is more than a grain of truth to the remark.

My sense from the outside is that Osborne will probably stick by the announcement on child benefit, in spite of the rage from certain sections of the press, and try to paper over the cracks by making the sort of vacuous, moralising intervention on marriage that has already been indicated. I may not know a great deal about Osborne’s mindset but experience demonstrates that, given a range of options, instinct normally leads him towards the wrong one.

Perhaps the middle class outrage at the (frankly quite messy) changes to Child Benefit is the start of something faintly encouraging. I don’t mean in the sense that Women’s Institutes the length and breadth of Britain will start to become more politically engaged, but that – finally – there is a flicker of scrutiny of Tory policy from the party’s friends in the right-wing press. This is unlikely to unleash a full-scale examination of the darkness at the heart of the Conservative world view – the Mail, Telegraph and Murdoch propaganda sheets know where their bread is buttered – but the press may yet find it hard to supress their natural instinct to hunt down an individual when they scent weakness. Osborne may have some difficult months ahead of him.

It’s hard to see how Osborne can find himself in a position to pull any rabbits out of the hat. The economic situation is bleak and by any measure he was a strange choice for Chancellor given the options available to David Cameron when the Coalition was formed. Both Vince Cable and Kenneth Clarke were clearly better qualified for the job and there can be little doubt that Osborne holds his position (arguably the first ‘proper’ job of his life) purely as a result of the personal loyalty of the Prime Minister. Such loyalty is worth a great deal of course, as the continual, bewildering survival of Andy Coulson demonstrates, but is it really doing anyone any favours?

The coming months will test the Coalition to breaking point. The government will inevitably become increasingly unpopular as the cuts start to bite, and much pressure will fall on the Liberal Democrat involvement, depending on next year’s elections and the outcome of the AV Referendum. Crucial at such times is the work and vision of the Treasury, as the fulcrum of the business of government. The biggest worry for the Coalition must be that so much therefore depends on the wisdom – or otherwise – of George Osborne.

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If you lie down with dogs…

If you lie down with dogs there’s a good chance you’re going to get up with fleas. With that in mind, I don’t suppose I should be in the least bit surprised at the nature of this week’s Budget, not least the inclusion of the Tories’ favourite tax, VAT.

I’m also fully aware of the nature of coalition. There are those who express surprise at the amount of Lib Dem election manifesto commitments which have either disappeared or been completely reversed, but I guess these people haven’t grasped the concept of being the junior partner in a coalition. The Tories have the lion’s share of the seats and so the government’s agenda is basically theirs with a few added Lib Dem bells and whistles (movement towards a £10,000 tax allowance, for example, or a referendum on limited voting reform).

But I still can’t get past the thought that the price of these noble policy aims has been to accept a regressive Budget from a Chancellor who clearly doesn’t give a damn about those less well off than himself (in other words, most of the rest of us). I deliberately didn’t post in the immediate afterscorch of the Budget for fear of bursting out with a purely emotional response to its provisions, but three days on and my view of it is pretty much the same.

I can accept some of the cuts for the simple reason that as a country we can’t simply keep on spending money we clearly don’t have. Contrary to what the Labour Party will tell you, running a massive deficit is not a progressive policy because someone will have to pay for it in the end and the longer we wait the more it will cost, both in terms of cash and public services. That said, there has to be a balance between controlling spending and making sure such cuts don’t damage the wider economy. I think the nature and timing of the cuts will put the economy at serious risk and that the coalition has taken this leap for ideological rather than pragmatic considerations.

Inevitably part of the ‘medicine’ comes in the form of increased taxation, but here is the most glaring case of Tory ideological fingerprints all over the Budget. (I know I’m running the risk of turning this blog into a continual rant about VAT but I really do believe it is a most unfair revenue-raiser which disproportionately punishes those who can least afford it.) I think I could probably have lived with much of the remainder of the Budget had the Chancellor looked towards Income Tax as his source of increased revenue, but that was never going to be on the cards. Throughout the campaign the guarded comments of both George Osborne and Alistair Darling can have left no one in any doubt that, whichever of them was Chancellor, they would look to VAT to balance the books. What has been surprising is how meekly the Lib Dems, who rightly spoke out against the tax during the election, have allowed the rise to 20% to be nodded through.

I can’t pretend I’m happy about the Budget (or the coalition for that matter) but none of that stops me being a Lib Dem, albeit on the progressive social democrat wing of the party. I’m also relieved to have an excellent local Lib Dem MP (Dan Rogerson) rather than a Tory alternative. I’m certainly not going to jump ship – Labour are, let’s not forget, the authoritarian, warmongering joke that helped get us all into this mess in the first place – but equally I have no intention of being an unquestioning apologist for the coalition. I will happily applaud them when they do well, and there is already much they can point to, particularly in the area of civil liberties. But I’m no longer prepared to stay silent when they indulge in the morally indefensible, as they did this week with Osborne’s Budget.

VAT: the sneakiest tax

I suppose the bedrock of any coalition must be the readiness to compromise. It is for that reason that the Lib Dems have had to swallow (among other things) the Tories’ aggressive cuts agenda and Michael Gove’s potty ‘Free School’ nonsense in return for progress towards a £10,000 tax threshold, limited political reform and the ability to restrain the mouth-foaming wing of the Conservative Party.

Within the culture of compromise there still have to be red lines, however. With George Osborne’s ‘Emergency’ Budget on the horizon, first and foremost among these should be a Lib Dem refusal to countenance any increase in VAT.

As I’ve written before, VAT is the worst tax of all. It gives the impression of fairness (no one is exempt, the more you spend the more you pay in tax) yet disproportionately punishes the poorest because they naturally spend a higher proportion of their income (VAT accounts for 13.6% of the gross household income for the poorest 10%, compared to 4.1% for the wealthiest 10%). In addition the wealthy can afford to have their accountants play with the books and claim large chunks of VAT back from the taxman – those on the minimum wage cannot.

Let’s not forget that the Tories spent most of the election campaign bitching about the rise in NI contributions (in fact, they could barely squeeze a sentence out of their over-indulged mouths without uttering the campaign’s most irritating soundbite – “Labour’s Jobs Tax”) yet now there’s every chance they will impose an additional cost on small businesses in the form of VAT. Never mind, at least the super-wealthy won’t be too badly affected.

Of course, Labour supporters will erupt in faux outrage if and when Osborne raises VAT on Tuesday, conveniently ignoring the fact that their standard defence when asked about an increase during the election campaign was exactly the same as the Tories – “We have no plans to raise VAT” or “You can’t expect me to reveal what would be in our first Budget”. They will try to have a field day on this issue, but anyone from the Labour Party who tells you they wouldn’t have raised VAT if they’d won the election is either dishonest, deluded or both.

Lib Dems are naturally opposed to regressive forms of taxation such as VAT – or at least, they should be. There’s little dispute that, allied with a certain level of spending cuts, taxation will have to rise to offset the deficit left by the last government, but surely the fairest – and most honest – way of doing that is via Income Tax. This most straightforward of taxes is based on what you earn, and is clearly outlined in your payslip. It is universally regarded as the most ‘progressive’ form of taxation and, while no one particularly likes paying it, at least we would all know where we stood. Why then are the Coalition so scared of it?

The Tory passion for VAT

In the run up to this year’s General Election there is continuing speculation that both Labour and the Tories have secret plans to increase the rate of VAT to 20%. There are grounds to suspect that, in the event of a majority government for either party, the continuing fear of raising Income Tax may prompt such a move. Of course the Tories have always been keen enthusiasts for regressive taxation such as VAT, and they look the more likely to push for an increase. After all, they do have something of a history.

When Margaret Thatcher arrived in Downing Street in May 1979 the rate of VAT stood at 8%. Within a month Geoffrey Howe, in his first Budget as her Chancellor, had raised the bar by almost double to 15% and thus prompted a massive shift in the tax system from what we earn to what we spend. So began the Tory love affair with VAT.

Value Added Tax was introduced by Ted Heath’s Conservative government in 1973 as part of the conditions for Britain’s entry to the European Economic Community and the initial rate was set at 8% (with a 12.5% rate for certain luxury goods). During the 1979 Election the Tories repeatedly denied that they had any plans to double the rate of VAT, hiding behind the pedantry that a rise from 8% to 15% wasn’t quite double the rate they inherited. No matter, twelve years on Norman Lamont completed the job by raising the tax to 17.5%, the rate it stands at today. The 1991 hike was supposed to be a temporary measure to cover the cost of the switch from the failed Community Charge (Poll Tax to you and I) to the only slightly less unfair Council Tax. Unsurprisingly the Major government never reversed the rise.

The Tories love VAT because it is a tax on spending, it is easy to collect and enables rates of Income Tax on the highest earners to be reduced. Taxes such as VAT always have the biggest impact on the poorest in society because naturally a larger proportion of their income is spent on day-to-day items. The net effect is that the lower your income, the larger the percentage of it that goes to the Treasury.

David Cameron and George Osborne are being very cagey on the subject at the moment, but if the Tories manage to form a government after the election no one should be surprised if VAT stands at 20% before the end of the year. The generational Tory denial about this most regressive of taxes is highlighted by the continuing lack of concern that their largest individual donor, Michael Ashcroft, seems strangely reluctant to clarify whether or not he pays tax in the UK at all. It’s hardly breaking news to point out that the Tory approach to taxation is based on two very different sets of rules: one for the rich and one for everyone else.

See also:

VAT: The Tories’ Favourite Tax