The notion of ‘unfunded tax cuts’ seems set to be a central theme in next year’s election. David Cameron’s promise last week to raise the income threshold for the 40 per cent tax rate has led the Liberal Democrats to accuse him of planning ‘unfunded tax cuts’ for the rich – which they, being the guardians of fairness, would put an end to.
Except there is no tax cut. Cameron is moving the top rate of tax at roughly the same pace as earnings. Were he moving it any more slowly, he would effectively be raising taxes by hauling more people into the 40 per cent bracket. The absence of a tax rise is not a tax cut, as Fraser argued the other day.
We can blame America for the phrase ‘unfunded tax cuts’. It was coined in the 1980s as a bludgeon against the Reagan Administration’s efforts to shrink the size of government by depriving it of tax revenue. George W. Bush revived Reagan’s so-called ‘starve the beast’ agenda with tax cuts that he said would act as ‘a fiscal straitjacket for Congress.’
It didn’t work out that way, mostly thanks to new welfare entitlements implemented under Bush. The term ‘unfunded tax cuts’ thus became a convenient way to acknowledge that the US government spends far beyond its means and that there is a ‘funding’ problem. But of course it’s a problem of not enough tax, rather than too much spending.
It’s odd for your correspondent, an American, to hear the phrase in the British political lexicon. Tutting about ‘unfunded tax cuts’ is a reliable way to sound clever about fiscal policy, without having to know much about the fiscal issues.
To state the painfully obvious, taxes are funds. Reducing them requires no funding, and can not logically be said to “cost” anything – unless your starting assumption is that everyone’s money really belongs to the government. Cutting taxes stands to diminish the pot with which the government funds its activities. But the problem is not with ‘unfunded tax cuts,’ but rather with unfunded liabilities.
At last official count, in 2012, the Office of National Statistics estimated the UK government faced £3.8 trillion in state pension obligations alone. That is to say: it has promised £3,800 billion to people without working out where the money will come from. Rather a large problem, don’t you think? But don’t expect to hear it discussed in any party conference, because this is one problem that no one knows how to solve.