If Philip Hammond is serious about reforming the economy, he needs to face down lobbyists
There was a staggering fact buried in the International Monetary Fund’s latest report on the Greek economy. The IMF worked out how many households around the euro area paid no income tax and found that the average was nearly 10 per cent — one in ten households that contributed nothing to the most important national pot. The figure for Greece? More than 50 per cent.
Astounding, right? But before you start muttering about lazy good-for-nothing tax avoiders, consider this: had the IMF included Britain in its table, it would have come a close second. According to the Institute for Fiscal Studies, more than 43 per cent of UK adults will not pay a penny in income tax this tax year.
The explanations are different in each case, though both come down to the same thing: not so much tax avoidance as the structure of the tax system. More specifically, in Greece the average wage has collapsed so far that a record number of people are now earning less than the level at which income tax kicks in. In Britain it’s the other way round: wages are still (just about) rising but the government has raised the tax-free threshold even faster.
This illustrates an under-appreciated fact about the UK economy. While many countries rely heavily on one or two taxes to bring in their revenues, Britain’s tax base is unusually wide.
So while the United States generates 37 per cent of its revenue from income tax, and while Denmark gets 54 per cent, here in the UK the figure is only 27 per cent (the number in Greece is just 16 per cent). In fact, when you add on social security contributions, or, as we call it, national insurance, Britain’s exchequer has the lowest reliance on wage or job taxes of any major economy.
The Treasury therefore has to generate its money elsewhere, so Britain’s tax base comes from all over the place: a big chunk from VAT, some from corporation tax, a bit from inheritance and capital taxes and a lot from property taxes. In fact, when you include stamp duty, it turns out that Britain is more reliant on property taxes than any other country in the developed world.
What if we decided to revalue council tax or get rid of tax breaks?
Now, having a wide tax base is no bad thing, especially when you’re worried about one or other source of revenue drying up. However, lots of different taxes also means that lots of people get naffed off whenever you try to change anything.
The recent furore over business rates is a case in point. Of course, there are many wonderful independent shops and businesses that will suffer as this property tax gets updated to reflect the latest property values. I have enormous sympathy for retailers fighting the disruptive forces of the internet and out-of-town stores.
But should the government reconsider the business rates overhaul, as some are suggesting? Not a bit of it. For all that’s happening here is that a property tax is doing its job: charging landowners more when they benefit from an increase in their land’s value. So yes, places where property prices have risen get charged more; places where prices are less buoyant will see cuts. And while shopkeepers might feel they are bearing the brunt — particularly in the first year or two — ultimately business rates are a tax on landowners. After a few years, higher rates push down rents, which in turn hit landlords’ pockets.
Don’t get me wrong; business rates are far from the perfect tax. In an ideal world, land would be taxed, rather than the buildings on it. Revaluations would also happen every year rather every five years (the most recent gap was seven years) and there would be fewer loopholes that let people off the rates.
But we do not live in an ideal world. We live in a world where every time the Treasury attempts to change a tax, those with the most lobbying muscle make an almighty fuss. That raises the question: if there is this much palaver over business rates, what if, God forbid, the government ever decided to revalue council tax properties, which it has not done since 1991? What if it attempted to get rid of the myriad exemptions on VAT, or to abolish tax breaks for self-employed workers? What if it tried to bring in road charging across the country, or charged for GP visits? All ideas that would make plenty of economic sense but which are unlikely to happen any time soon.
If you’ve ever wondered why Britain’s tax system is so mangled, so riddled with loopholes and perverse rules, the answer lies in this story. Every time anyone comes close to overhauling it, they have to fight these kinds of battles. Brave governments stick to their guns. Weak ones U-turn.
Downing Street has made a poor start. That it allowed the story to snowball this past fortnight highlights just how inept its media management has been. Then there’s the complete absence of an effective opposition. The Labour Party could have spent the past few weeks vigorously campaigning on the health service. Instead, any extra money the government might budget to give away next month could go to wealthy shop landlords instead of social care. (You did realise, didn’t you, that business rates are precisely what local authorities are supposed to be using to pay for social care?)
So this moment is a useful litmus test on how brave Philip Hammond really is. Does he have the mettle to be a reforming chancellor? If so, fighting the business rates campaigners will only be the start of it.