Progressive taxation to reduce the deficit

The Government wants taxation to contribute just a 1/5 to deficit reduction. A range of think tanks and The Economist are advising them to focus more on taxes.

A range of progressive think tanks and even the Economist magazine are advising the Government to reduce the deficit with a greater focus on tax rises – George Osborne has said he wants to rely on taxes for a fifth of the consolidation. But as the picture below from the Economist shows, most of the largest fiscal consolidations have seen a more balanced ratio.

In an article yesterday for Left Foot Forward to accompany a new report, ‘Deficit reduction and the role of taxes‘, Tony Dolphin of IPPR writes:

“If the government wants to be progressive, it should give a greater role to higher taxes … 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”

Echoing these arguments, Matthew Whittaker of the Resolution Foundation writes, “the deficit reduction plan must exhaust every single potential progressive taxation measure before turning to spending”. He goes on to call for a wealth tax.

Meanwhile, in the Guardian yesterday, Labour leadership candidate David Miliband writes:

“If the Tories stick to their proposed formula of £4 of cuts for every £1 of tax rises this will see departmental spending slashed by a third outside of the NHS and international development. The balance should be 2:1.”

The Tories approach is also challenged by the Demos think tank who also call for a 2:1 rather than 4:1 ratio. They urge the Government to introduce £11 billion of tax rises above and beyond Labour’s plans which included the introduction of a 50p rate and increase National Insurance Contributions. Demos propose aligning all capital gains rates with income tax rates and charging CGT on primary residences when sold; raising the basic rate of income tax by 1p; moving from per-passenger air duty to per-plane air duty; and introducing a carbon tax. Even the Economist believes that the Conservative’s plans are too focused on spending cuts:

Unwelcome though it is, a contribution from higher taxes is required. Just how big it should be is a matter of dispute. The Tories have said they want to rely on taxes for a fifth of the consolidation. That may be too ambitious. If something like 2% of GDP were found by higher taxes, leaving spending to be cut by 5% of GDP, it would still be a tougher mix than all but two of the ten biggest OECD deficit-cutters managed.

The outlier in this debate remain the right-wing think tank, Reform, who this week called for over 90 per cent of the deficit reduction to come from spending cuts.

27 Responses to “Progressive taxation to reduce the deficit”

  1. James Graham

    RT @leftfootfwd: Progressive taxation to reduce the deficit http://bit.ly/d309NZ

  2. Claire Louise French

    RT @jamesgraham: RT @leftfootfwd: Progressive taxation to reduce the deficit http://bit.ly/d309NZ

  3. Fat Bloke on Tour

    Will

    Good stuff on the best way to rebalance the economy — the cuts / tax increase split.

    However that is only one part of the job needed to overcome the economic fiction being put out by the ConDem Coalition and lapped up by all their upper middle class dog boiling friends in the media.

    Labour needs to expose the fiction of the structural deficit:
    Seemingly running at 8.8% of a 11.1% deficit.
    Cyclical deficit therefore being given as 2.3%.
    That is we have a deficit due to the Credit Crunch of 2.3% after a GDP fall of 6.2% over nearly 2 years leading to a GDP loss of 10/11% versus trend and this has only cost the country 2.3% of GDP.
    Any one else think this number looks suspiciously small?
    Double it and I think you would be closer to the truth.
    How can the Treasury / OBR be 100% out?

    On the structural deficit I have two issues with this method of publicising the problem:

    1) The structural deficit figure includes investment.
    The current / investment split is given as 5.3% / 3.5% investment.
    5.3% looks a lot more manageable than the figure they are pushing.

    2) What are the numbers and methodology behind the figure of 8.8 % or even 5.3%?
    Again it all looks reverse engineered to me, we have an answer now lets think of a question.

    That brings me to the output gap.
    The amount of the productive capacity of the economy lying dormant and unused at the moment.
    This is used to size the structural deficit.
    Structural deficit = Total Deficit – Cyclical Deficit
    Cyclical Deficit = 50% of the output gap this year + 20% of the output gap last year.
    The current number was developed by the OBR and they reduced the Treasury’s figure of 6% to 4%?
    Again anyone think this is nuts in light of the current economic climate?
    Just a Q+D analysis of the numbers it looks shockingly small.
    The 4% figures is being treated as the Gospel Truth even after a 6.2% drop in GDP over nearly two years leading to a loss of 10/11% of GDP against trend.

    Even worse is the OBR’s thoughts for Dec 2010.
    Trend growth is given as 2.1%, low but never mind.
    Their growth estimate is 1.3% for 2010.
    Given those numbers you would expect the output gap to increase?
    Well not according to the OBR’s Chart 3.2, it shows the gap getting smaller.
    This really is Voodoo economics for the new millennium.

    Finally back to the Tax / cuts conundrum.
    Good starting point but Labour has unfinished business here.
    Before any figures are set in stone two things need to be looked at:

    Tax changes, all the howlers left in place need to be sorted out.
    Specifically the CGT / IT / Corp Tax discontinuities so beloved by high earning chancers everywhere.

    Secondly a review of all the bloated contracts and PFI “umbrellas” needs to be looked at.
    £1.1bill to fix the A14 is the DfT and its contractors having a laugh.
    £6-7bill for SAR helicopters is procurement at its worst.

    How Labour ever allowed its civil servants to misuse an important funding mechanism is beyond me.

    Note to “Hopeful 5”,managerial competence is now top of the list of the required attributes to build a better Britain.

  4. Therese

    RT @jamesgraham: RT @leftfootfwd: Progressive taxation to reduce the deficit http://bit.ly/d309NZ

  5. Mr. Sensible

    ‘Fat Bloke on Tour’, I agree with you on the structural deficit.

    Indeed, in the OBR’s predictions they said that the overall deficit would come in 0.6% of GDP lower than forecast in March, which was based on public borrowing for May coming in at £18 billion.

    And, as reported in today’s Guardian borrowing for May came in £2 billion less than that:
    http://www.guardian.co.uk/business/2010/jun/18/uk-budget-deficit-lower-than-feared

    What’s more, another good place to start might be to scrap the coalition’s tax and spending plans, such as ‘Free Schools’ and the Married Man’s tax allowance.

    Indeed, I read in the Guardian today that, according to a leaked memo the government was prepared to cut Free School Meals to fund it!
    http://www.guardian.co.uk/politics/2010/jun/18/school-plan-takes-money-from-poor

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