Overhaul Britain’s rotten tax system or we won’t be able to sustain a healthy state | Will Hutton

Will Hutton
‘The British residential property system is creating surreal house prices and monumental social unfairness.’ Photograph: Toby Melville/Reuters

Acommon feature of all countries in long-term decline has been an inability to overcome the grip of malign sectional interests on their affairs. Eighteenth-century Spain, 19th-century China or the 20th-century Soviet Union were all pulled into self-destructive vortices. For different reasons, none could address fundamental economic and political dysfunctions. The Spanish nobility, the Chinese mandarinate and the Russian communist kleptocracy might have benefited from the way their respective societies were rigged but they were too powerful to be challenged. The question is whether 21st-century Britain can escape from the way its society is rigged to avoid the same fate.

A classic example is the British tax system. The country has become incapable of thinking or talking straight about tax. It may be, as Theresa May said in her shortlived campaign to win the Conservative leadership, that “tax is the price we pay for living in a civilised society”. Equally, the chancellor, Philip Hammond, is no less correct to say, as he did on Friday, that the “triple lock” – outlawing rises in income tax, national insurance and VAT, the major workhorses in any tax system, a gimmick introduced by George Osborne – did “constrain the ability of the government to manage the economy flexibly”. He could have gone further; as virtually every observer notes, the triple lock is economically absurd.

But can May and Hammond’s attempted sanity on tax survive a general election campaign? The way our political system and national conversation are constructed make it close to impossible for a leader to say anything sane about tax.

The ideological right’s propositions – that tax in principle is immoral, coercive, anti-enterprise, anti-aspiration and always economically destructive – now set the terms of discussion, policed by our rightwing media. The consequence is that the tax system is now so gravely distorted that it threatens the social fabric. One of the crucial dimensions of the next seven weeks is whether May and Hammond will be allowed by the zealots in their party and the media to hold the line (helped by effective argument from their opponents, it is to be hoped). The omens are not auspicious.

Thus it is a commonplace that the British residential property system is creating surreal house prices and monumental social unfairness. Huge mortgages for the young, the lottery of property inheritance and crazily high rents are becoming permanent parts of our social landscape.

But crucial in this story is that property is effectively only taxed when it is bought and sold. There has not been a revaluation of residential property prices, on which the ineffective council tax is based, since 1991. As a result, the property market is, because of generous inheritance tax thresholds, tax exemption of capital gains on homes and trivial council tax receipts, the world’s biggest onshore tax haven creating the world’s highest real house prices. No proposal for change seems possible, even from those “extremists” Jeremy Corbyn and John McDonnell.

Equally, it is clear that public services, after seven years of swingeing cuts, have reached a tipping point where severe deterioration is certain if planned reductions go ahead. The condition of Britain’s prisons is already intolerable: the stress in the NHS is apparent to all; improvements in educational standards are being reversed. All, starved of resources, can only get worse.

The previous chancellor, George Osborne, operating his triple lock and anxious to offer big corporate tax giveaways, could shrink Britain’s budget deficit only by cutting government spending as a share of GDP to levels not witnessed since the 1950s. Yet health and education spending – public goods from which everyone should benefit and thus paid for by taxation – have been rising consistently for over 60 years, as they should and will. A wealthy country whose economy is based increasingly on knowledge and know-how must continue to spend more proportionately on education and science and, as its citizens grow richer, more on wellbeing and health. To try to turn back this long-run growth or, alternatively, to eviscerate the social security system to find the necessary resources, is to buck reality.

Thus the government has been compelled to raise revenue beyond the workhorses frozen by the triple lock. The insurance and airline taxes, the now binned proposed increases in national insurance contributions for the self-employed and on probate fees – all are means to raise vital revenue prohibited by the triple lock and the self-imposed prohibition on taxing property wealth.

Yet these only create further distortions. Britain must create a tax system that raises revenue across a broad base as fairly and with as little economic distortion as possible and it must accept that if it wants health and education to remain public goods financed by general taxation, along with a reasonable social security system, then taxation will have at the very least to remain around 35% of GDP and may even have to rise a little.

McDonnell was doing a service by recognising last week that the tax take must increase, but it will need to be drawn from a much wider base than just on the “rich” – the top 5% – earning over £70,000 or from big corporations. There just is not enough potential revenue from those sources: and, as one in 10 of the workforce can expect to make £70k at some time in their working life according to the Institute of Fiscal Studies, it is not especially politically savvy.

A much smarter strategy would surely be to acknowledge that May and Hammond are right: tax is the price for living in a civilised society and making the major tax workhorses off-limits is crazy. But we have to go much further within a fair framework if we want decent public services and be able to manage the economy flexibly.

The broader the tax base, the lower tax rates need to be. We need a revaluation of domestic residential property and an overhaul of council tax as part of a wider review of how local government is financed. Add to these a fair tax on inherited wealth; a broadening of the VAT base, with an extension to financial services; heavier taxes on environmentally damaging activity. Together, as Nicholas Stern has argued, these could raise some 2% of GDP, so that only marginal or very small increases in VAT, income tax and national insurance would be needed, if at all.

Britain could have high quality public services, a great environment and a functioning housing market – and very few would notice the difference in their taxes. A country on the rise would do this in an instant. It is a declining country in thrall to rightwing ideologues that finds it impossible – that will be Britain in spring 2017.

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