A truly progressive government would give a bigger role to increasing taxes than was suggested in either the Conservative or Liberal Democrat manifestos.
Tony Dolphin has written a paper on ‘Deficit Reduction and the Role of Taxes’ – download it here
George Osborne will set out the coalition government’s fiscal strategy in his first budget on Tuesday, June 22nd. The coalition agreement says the government will cut the deficit at a faster pace than planned in the March Budget and, since both Conservative and Liberal Democrat manifestos proposed a bigger role for spending cuts in deficit reduction than did Labour, we are likely to see the toughest set of public spending plans announced in the UK for more than 70 years.
This will severely dent the government’s claim to be progressive. The ultimate test of its progressiveness will be who pays for deficit reduction? Only if the most vulnerable members of society are protected from most of the effects of deficit reduction, can the government can claim to be progressive and this will not be the case if, as seems likely, the plan is to achieve 80 per cent of deficit reduction through public spending cuts and only 20 per cent through tax increases.
If the government wants to be progressive, it should give a greater role to higher taxes. It may, in any case, eventually be forced into doing so. Cumulating evidence that frontline services are being badly hit by cuts will make it very difficult for the government to stick to plans that imply real reductions in spending of 25 per cent or more for most government departments.
Which taxes go up – whether now or at a later date, also matters. Increasing the standard rate of VAT is not the act of a progressive government.
A better option – one that shares the burden of deficit reduction around a large proportion of the population but in a progressive way – would be to increase the basic and higher rates of income tax, something that has not been done in the UK since the mid-1970s. A 3p increase in the basic and higher rates of income tax would raise £15 billion – around one-fifth of the amount needed to eliminate the structural deficit.
At the same time, the coalition should not be deflected from its commitment to align rates of capital gains tax with income tax rates. Only the rich will pay more tax as a result of this change, which will be a key test of its claim to be a progressive government.
Other options for increasing tax revenues include a carbon tax (though this would be regressive and would have to be accompanied by some form of compensation for those on low incomes), higher taxes on banks and other financial institutions in the form of levies on their liabilities and on their profits and remuneration (both recently proposed by the IMF) and a broad-based financial transactions tax.
It is unwise to step up the pace of deficit reduction while private sector confidence and spending remain weak, but the government seems determined to do so, claiming that it is not progressive to run large budget deficits. But the real test of the government’s progressive credentials will be the way that it chooses to reduce the deficit. Swingeing cuts in public spending will hurt the poorest members of society disproportionately.
A truly progressive government would give a bigger role to increasing taxes – and specifically increasing income tax rather than VAT – than was suggested in either the Conservative or Liberal Democrat manifestos.
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7 Responses to “Tax increases must play a greater role in deficit reduction”
House Of Twits
RT @leftfootfwd Tax increases must play a greater role in deficit reduction: http://bit.ly/cLyTRj #Budget
winston k moss
I DO RECALL THEY(condem us all nation party) SAID THEY WOULD ASK AND INVOLVE THE ELECTORATE.WHAT,WHERE AND HOW WAS SUPPOSED TO BE A OFFER TO TACKLE THE FISCAL DEFICIT CHALLENGE OR WAS IT JUST HOT AIR?
Liz McShane
“David Cameron admitted that he found it “painful” to work with Martin McGuinness”
I would imagine that Martin McGuinness probably feels the same working with a Tory-led Government & a PM who is a staunch admirer of Margaret Thatcher.
SCUBA junkie
Tax increases must play a greater role in deficit reduction | Left …: Published by Tony Dolphin, June 18th 2010 … http://bit.ly/bRcEJP
Progressive taxation to reduce the deficit | Left Foot Forward
[…] an article yesterday for Left Foot Forward to accompany a new report, ‘Deficit reduction and the role of taxes‘, Tony Dolphin of […]