4 September 2023

Why aren’t tax cuts cutting through?


It wasn’t headline news, but a few days ago the Office for National Statistics revealed that public borrowing for July stood at £4.3bn, significantly less than the £6bn the Office for Budget Responsibility had predicted in the spring. Clash of the quangos! As surely as thunder follows lightning, this announcement was followed by Sir John Redwood, arch-priest of the continuing Thatcherite revolution, urging the Government to use this unexpected fiscal headroom to cut taxes.

One can hardly fault Redwood’s consistency. It is nearly 40 years since the young, distinguished Oxford academic took charge of Margaret Thatcher’s policy unit in Downing Street. From the beginning he was pushing privatisation, lower expenditure and liberalisation.

Of course Redwood’s instincts are right. Low taxation is a key principle of the Thatcherite settlement. Remember that when Thatcher became prime minister in 1979, the top rate of tax on investment income was 98%. And it seems ineluctably true that tax cuts will be popular with the electorate: who doesn’t want to pay less tax? Historians will point to Rab Butler’s budget of 1955, which cut income tax and raised personal allowances, then saw his government re-elected the following month; or Nigel Lawson’s 1987 package, which even the opposition admitted offered ‘across-the-board cuts’ in taxation and preceded another election win.

But it’s not working. Like Admiral Beatty muttering, ‘There seems to be something wrong with our bloody ships today’ at the Battle of Jutland, promising tax cuts isn’t winning support. I think there are a number of reasons for this. The first is that the electorate is so disenchanted that it simply doesn’t believe pledges to lower the burden of taxation. It is the sort of promise that politicians always give, and a cheap, if direct, appeal to self-interest.

More fundamentally, polling data suggest ‘tax cuts’, branded in the traditional way, are not high up the electorate’s agenda. Work by Opinium in anticipation of Liz Truss’s brief premiership last year found that not much more than a fifth of voters wanted lower taxes if it led to lower spending. A quarter of voters positively wanted taxes and spending to be increased, while 33% felt the balance should be unchanged.

Two things need to happen. The first is that the Government, the Conservative Party and everyone who believes in free markets and economic liberalism have to pound home the message, day after day, that low taxation is an inherent virtue. Tax is, if you like, necessary theft: the Government takes away our money to pay for those services and facilities which we have decided it is best to have in common. Cutting tax is not giving money away. It is deciding not to take it in the first place. This is as basic a virtue of economic and personal liberty as you can get: we perform work for which we are paid money, labour exchanged for capital. Our imaginary scale should start with us retaining that earned income, and then descend in a series of necessary compromises until we reach the level of taxation we need, rather than assuming a kind of ‘natural’ level of 20-25% and varying from there.

In this context, the Adam Smith Institute’s notion of Tax Freedom Day is useful. It calculates the point in the year at which, notionally, you have paid your obligations to the Government in taxation and other duties, after which you get to keep the money you have earned. This year, terrifyingly, it fell on 18 June, and is predicted to be a week later by 2025. That focuses the mind. By the middle of June, summer is creeping out, and we feel the year is well underway. Yet, in one sense, we have earned not a penny for ourselves. This is an impingement on personal freedom and autonomy.

The other shift we need to make in perspective is to break the simplistic link between high taxation and higher public spending, and the idea of higher public spending automatically being a good thing. We have already come some way on this – it is now a commonplace of discussions of health policy to acknowledge that the NHS needs more than simply more resources. When you are trying to draw a bath, the amount of water you put in is important, but so is the condition of the bathtub.

Our old friend the Laffer Curve can be debated endlessly, but it is an obvious truth that lower taxation means people have more money to spend on things they want. It devolves personal responsibility. The relationship is not simple but if we look at the most economically competitive countries, many, like Switzerland, Singapore and Taiwan, have low rates of taxation; and anyone who believes that the state is in general the most efficient way of delivering services has never interacted with a government department or body.

So the message needs to be more than simply, ‘cut taxes’. To double up on ghastly phrases, we need to ‘show our working’ and ‘create a new narrative’. Allowing taxpayers to keep more of the money they earn is good, and bends towards freedom, but it also allows us to spend more, and spend it in ways we choose. This can lead to economic growth and the more efficient, effective and targeted delivery of services. These are big concepts, and they matter. To paraphrase then-Governor Reagan’s cautionary dictum, remember what you chose instead of freedom, because when your children ask, they’re going to want to know.

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Eliot Wilson is co-founder of Pivot Point Group

Columns are the author's own opinion and do not necessarily reflect the views of CapX.