Coffee House

Why George should listen to Danny

23 February 2012

10:08 AM

23 February 2012

10:08 AM

In the new Spectator, we back the Liberal Democrats’ plans to raise the tax
threshold to £10,000 — provided that the money is found by cuts in state spending rather than the pensions raid they propose. It’s not top of my list of tax cuts, but we have to
accept the realpolitik. It’s the only tax-cutting option that has advocates in the Treasury.

There are plenty of proposals around to cut taxes and wake the British economy from its ‘lost decade’ slumber. The need to use tax cuts as a remedy to the deficit will be familiar to
anyone who has followed the American presidential debate: every candidate, even Romney, has their own list of radical tax cuts. The basic concept which JFK outlined in 1962 (speech here) remains: that a deficit caused by overspending is a sign of sclerosis, but one caused by tax cuts is transitory because the economy will be
moving to an era of higher growth. The Tory leadership rejects this JFK logic, and will tolerate a corporation tax cut but no more. (This is a legacy from the 2005 Tory wars, where David Davis was
attacked for his ‘unfunded tax cuts’ — a Brownite idea which, alas, stuck).


Other people have been planning pro-growth tax cuts, and Jonathan provided a handy list of
yesterday. I am personally drawn to those by the Centre for Policy Studies (see its brilliant Adrenalin Now
paper). The Centre for Social Justice says that a marriage tax break is better-targetted at the poor. There are ideas from the Free Enterprise Group of Tory MPs (now, alas, reduced to a caucus
within the party) and Liam Fox’s plans for employment tax cuts also make lots of sense. But we ought to face facts: George Osborne has shown few signs of interest in any of this. He thinks
he’s doing enough and that his slow-mo corporation tax cut will (to use his phrase) ‘put fuel in the tank of the British economy’.

The Lib Dems, therefore, have the only tax-cutting game in town — and they could do with some help from Conservatives making the case. So far, Nick Clegg has talked about his policy as some kind of fiscal pain relief: saving £60 a month. This is
popular (YouGov say 87 per cent like it) but even this undersells the policy. By making work pay more, it would likely move tens of thousands of people from welfare to work, augmenting the
coalition’s welfare reform strategy. Crucially, it might even pay for itself. The notion is denounced as cuckoo by some, but not by authorities in Sweden who now reckon that its tax cut for
the low paid has 80 per cent paid for itself due to less dole and more VAT receipts.

But let’s imagine that the idea of a self-financing tax cut is a little too futuristic for today’s policymakers, and that the £7 billion cost of Clegg’s tax cut has to come
from somewhere. As I argued on Tuesday, the government machine is spending
£9bn less this year by breathing in a little more sharply than it intended to: no schools or hospitals were harmed in the making of this spending cut. And this was by accident. What might it
do on purpose? This ought to be a textbook coalition compromise, and the centrpiece of next month’s Budget.

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Show comments
  • John Millington

    First of all I think it ought to be pointed out that this proposal of raising the income tax threshold was first proposed by George Osborne as part of a proposal to simplify the tax system. The LibDems took up the convenient part of that proposal.

    I do personally agree with the principle of tax reduction and so I wouldn’t object to raising the threshold. However, that is not how the article or even this debate has been framed. It has been framed in a typical ‘big state’ fashion – that the government can move a magic wand and suddenly the entire economy will be on the right foot again. Secondly, it has been framed as another anti-rich argument – the rich should pay for further reductions of tax on the poor, their ‘fair share’ as it were. Again, I don’t object to that mentality but I object to the idea that the poor have a ‘right’ to be paid for by the rich, which is precisely the mentality that this argument promotes. I think it does a disservice to the economy as a whole when a particular class is told that they have no responsibility in rebuilding the economy – that that is responsibility for the ‘less vulnerable’ members of society.

    Government fiscal policies only stand to amplify and direct the will of the individual in order to provide greater prosperity, but the will must exist in the individual in order for that to happen. By directing and collaborating in an argument that dismisses accountability we would be doing a great injustice to the future economic prosperity and liberty of our society. I argue that this is the wrong time to do this, but not the wrong policy.

  • Simon Stephenson.

    Publius : 3.09pm

    I agree with you. I’m criticising what’s happened over the last 20 years, not excusing it.

    Savers have held an unrealistic expectation of the commitment of borrowers to repay, and borrowers an unrealistic expectation that repayment will in reality become optional. Our social leaders have shirked their responsibily to close this difference of understanding.

  • daniel maris

    This is the most divisive government in living memory. The Lib Dems will suffer a heavy penalty for supporting the attack on people’s living standards while doing nothing to stop the elite lining their pockets further.

  • Malfleur

    Frank P

    Did you mean?:

  • TrevorsDen

    The govt should stick to its original time-scale for the 10k tax allowance and bank any deficit savings until 2014 and 2015.
    Opportunities to reduce our humongous deficit should not be missed and the out-turn is not yet assured.

  • Publius

    Simon Stephenson (2.32pm)
    “…people have been allowed… lacking in the ability to anticipate…think only in the short term.”

    Yes, Simon, all well and good. But you make the usual liberal mistake of thinking that the political problem writ large is soluble by rational scientific means. And this mistake leads to the hubristical policy errors from which we now all suffer.

    Put simply, rather than taking people as they are, the liberal fallacy is to take people as they think they should be.

  • Mr. Green


    That is partially correct, it does all hang on how your contract is worded.
    Clients do not want to be complicit in anyone elses’ tax affairs. Clients often have their own, standard contracts which preclude the kind of wording I would need in order to clarify my position. This is often done intentionally because the client is only interested in clarifying THEIR position should I be taken to court.

    And, the law being what it is, no matter how my contracts were worded, I would have to be willing to argue each and every contract in court – should the IR feel the need to investigate, which it has done.

    I can’t see how the government can pretend to be pro small business, when the IR35 legislation is there primarily to stop small businesses getting long contracts.

    So, until anything changes, I either have to risk court, or pay another company to ’employ’ me!

  • Simon Stephenson.

    Publius : 12.00pm and 12.01pm

    The point I’m trying to make is that the economic logjam we’re in is the specific “fault” neither of savers nor borrowers, but of the process by which the creation of debtors and creditors was made too easy, and which failed to take sufficiently into account the social conflict that would ensue when extension of this process became open to question. In simple terms, people have been allowed to create a foreseeable social problem, because taking steps to prevent it was counter-intuitive to those who are lacking in the ability to anticipate, and who therefore think only in the short term.

  • Kingstonian

    Mr. Green
    February 23rd, 2012 12:49pm

    “All the while the IR35 law is in place (making it illegal for a one-man LTD company to sub-contract to another company for longer than 6 weeks), …”

    Mr. Green, I don’t know where you get your information from but it certainly isn’t illegal to contract your services to another company for more than 6 weeks. IR35 is not a problem if you put the right contract in place, which essentially means that the copntract makes it absolutely clear that you are not an employee of your client and that you pay your own PAYE and NI.

    Check out the Professional Contractors Group (PCG) who can advise you how not to get caught up by IR35.

  • Tiberius

    Since Fraser refers to his previous blog on accidental savings, I’ll post my comment here that wouldn’t send last time.

    Fraser, using the short timescale between the two sets of projections still does not result in Darling’s being definitive. You can safely bet that the flexing he would have indulged in would have been larger than Osborne’s.

    As an FD, I can tell you that “accidental savings” are common and the best type. They are far easier to realize than those that have to be forced through spending departments. They also have the added bonus of the messenger taking the credit for once, rather than the bullet. Of course a really canny FD can build in “accidental savings” when he formulates his projections.

  • Mr. Green

    I’ve said it before, I’ll say it again…
    IR35 needs to be scrapped if the govmt wants me to believe that they are true capitalists.
    All the while the IR35 law is in place ( making it illegal for a one-man LTD company to sub-contract to another company for longer than 6 weeks), it is clear that this government is simply running scared of the socialists.

    I WANT to run my own LTD company, but I am not allowed to because my profession involves sub-contracting to larger companies.
    I WANT to employ someone, but instead I have to PAY another company £100 per week to ’employ’ me so that I can offer my services to another company! MADNESS.

    Even my dentist has to go through this exact same lunacy!

    Now that should be addressed in the budget.

  • Dave B

    That would be no income tax. They would still be paying National Insurance on their wages, and VAT/duty on their purchases.

  • Magnolia

    tb, the effective marginal rate of tax is 60% (and 2% NI) between incomes of £100K and £115K because the tax free allowance was stupidly withdrawn at £100K last April to prevent them from getting any advantage from it’s increase.
    If the tax free allowance is raised to £10K these earners will experience a further rise in tax.
    As I said, firstly abandon socialist policies.

  • Publius

    Frank P writes:
    “the Renegade Coffee House Wall”

    Thanks, Frank P. Just subscribed. A useful antidote to the left-liberal activists here who pretend to be conservatives.

  • Dave B

    I’m very much in favour of raising the personal tax allowance, but I hope that the tax credits system is dismantled at the time. Either/or rather than both.

    “The commonest error in politics is sticking to the carcasses of dead policies. When a mast falls overboard, you do not try to save a rope here and a spar there in memory of their former utility. You cut away the hamper altogether. It should be the same with policy, but it is not so. We cling to the shred of an old policy after it has been torn to pieces, and to the shadow of the shred after the rag itself has been torn away.” Lord Salisbury.

  • tb

    Are the lib dems wanting to remove the marginal 62% tax as well?

  • Publius

    (2)- continued from above.

    And I can tell you that in spite of the government’s attempt to debauch the currency, or perhaps indeed because of it, I am more inclined to save what I can and trust to my own resources rather than blow all my money and put my trust in what has shown itself to be an unrealiable and deceitiful series of governments.

    (Really, Spectator, will you not fix your hopeless bullying web site that prevents people posting another than the shortest Twitter-like comments!)

  • tom jones

    I’ve lost hope in Osborne. He did a terrible job as election co-ordinator and we’ve had no decent growth since 2010. He talks the talk, but then doesn’t walk the walk when it comes to the budget. Growth won’t just happen naturally. Labour made the economy so reliant on London and public spending that we need to be radical to get growth (without doing hugely unpopular things.)

  • Publius

    Simon Stephenson writes:
    “he borrowing classes being too indebted, and the saving classes being too value-rich…” etc.

    I have to say, Simon Stephenson, there is something almost bizarre about your jargon phraseology in your post above. Is there no place for prudence and fecklessness in your analysis? Surely the last thing one wants is for yet more government arm-twisting to force those who choose to save to do something other than they wish.

  • Simon Stephenson.

    What you fail to appreciate is that our economic malaise is centred around the borrowing classes being too indebted, and the saving classes being too value-rich. The fluidity of the system of value transfer has been compromised by an over-generosity to accumulators over the last 20 years or so, with the result that wealth distribution has become more and more skewed. There is no workable economic solution that doesn’t involve the re-introduction to the active economy of large amounts of currently somnolent wealth, and I fail to see how tax cuts will achieve this.

    The problem with the leverage of the last 20 years is the incompatibility of the respective promises which have been made to savers and borrowers. This has allowed there to be built up a conflict between the two groups, the inevitability of which a competent society ought to have foreseen.

  • AR

    If people pay no tax, how do you establish a contributory principle in the welfare state and what incentive is there for those that pay no tax to see spending constrained?

  • Slim Jim

    It’s all very well Osborne talking about ‘putting fuel in the tank of the British economy’, but as we have seen, the Liberals just want to keep putting sugar in it. Talking of fuel, how about reducing the ridiculously high amount of tax on fuel? As for ‘paying for it’, I agree with those who advocate more spending cuts, but let us not forget that Labour would only add fuel to the fire (to continue the metaphor) by borrowing to pay for it, or taxing the wealth creators more.

  • Magnolia

    Also, let’s beat Labour at their own game by considering a very low tax rate band, say, 1p or 2p, payable on all full time equivalent incomes less than say, £15K, but make unemployment benefit taxable as well (that would claw back some of the inflation rise).
    That way there would be no citizen of working age who has absolutely no stake in how government spends the tax income that is forcibly extracts from us by law.
    The poor need jobs with good wages and that needs a working economy.

  • Russell

    A more realistic figure of £15,000 per year personal allowance is needed, to encourage the unemployed to work, as the lowest paid workers (minimum wage) would then see significant benefits in work.
    Lowering the higher rate limits would ensure the higher paid in society pay their ‘fair’ share towards the gigantic debt labour and the bankers have left this country with.

  • Frank P

    A bit off topic (but not if you pull out to pan the bigger picture), this comment from Richard of Christchurch is over on the Renegade Coffee House Wall (RCHW):

    “The Spectator is making a big mistake in belatedly trying to turn into a Socialist bedwetters’ bible – Fraser Nelson is one of those select few: the rats which race to climb on board a sinking ship.”

    Wonderful! I’ve submitted it for this week’s entry to the Oxford Book of Quotations.

    But read it all …

  • Arthur

    Can we lose the Americanism? “…it would LIKELY…” You’ll be appealing a judgment next, rather than appealing against one. Harumph.

  • Magnolia

    Firstly abandon socialist policies.
    Cut spending and reverse the tax increases that have already happened such as the vicious 62% marginal rate of tax on incomes just over £100K. I believe this will pay for itself because avoidance (such as working less hard) will be rife after this January when people get their tax codes and realise that their tax free allowance has been ‘stolen’ because they are ‘rich’.

  • DavidDP

    Rather bemused as to Fraser’s consistent appeal to the authority of Kennedy. Is this a generational thing?

  • Robert Eve

    Cut spending.

  • LibertarianLou

    Brilliant piece.

    Also, the marriage tax break only gives a tax break to people who are in a fixed legal partnership, by definition they need it less than one person on one low income surely? And your money is your money – whether you live in a way the state wants you to live or not.