LET'S KEEP LOW TAXES IN PERSPECTIVE

 

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LET’S KEEP LOW TAXES IN PERSPECTIVE

 

I recently read an article by Tom Clougherty, the Head of Tax at the Centre for Policy Studies, a Thatcherite think tank, “How can Jeremy Hunt turn his tax rhetoric into reality?”.  If Jeremy Hunt reads it, I hope that he ignores it.  Indeed, I wouldn’t be surprised to learn that Kwasi Kwarteng had based his disastrous Autumn Statement on Tom’s advice, because they seem on the same page: lower taxes and everything will be rosy because lower taxes lead to growth.  But at least Mr Kwarteng knew that cutting taxes needed to be combined with other important changes to stimulate growth.  I am sceptical whether Mr Clougherty agrees.  He seems to be saying that lower taxes = growth, in spite of the markets having made clear last September that is an illusion.

 

Jeremy Hunt’s rhetoric apparently is that the UK needs a competitive tax system.  I suspect no one would disagree.  Tom looks for inspiration from other countries.  He points out that the 2022 International Tax Competitive Index puts the UK 26^th out of 39 OECD countries.  He points out Estonia, which tops the Index, has the same overall tax burden as the UK (33% of GDP) and the same standard rate of VAT yet gets 40% of its revenue from consumption taxes.  He concludes that if the UK’s VAT base were as broad as Estonia’s, we could make over £75bn worth of tax cuts in other areas.  He omits to say that this means if we impose 20% VAT on food and children’s clothing, both essential purchases for the poor, we can reduce income tax for the better off and corporation tax on big business.  Why should he be so coy not to come out and make clear that he wants to tax the poor more highly in order to reduce taxes on the less poor (which I suspect includes himself)?  Admittedly, I suspect very few people would support such a proposition, but surely it is a role of think tanks to posit the unthinkable!

 

Mr Clougherty accepts that this happy state of affairs (happy other than for the poor, obviously) cannot be achieved overnight but he thinks that as a first step Mr Hunt ought to:

 

a)      Abolish the 45% rate of income tax

b)      Let companies write off all capital expenditure against profits

c)      Remove “improvements” from the scope of business rates, and

d)      Lower the VAT registration threshold from £85,000 to the OECD average of around £40,000.

 

I doubt that Mr Hunt will do any of these in his March Budget – with the possible exception of (c) which will cost little and benefit very few companies.  It is not clear why Mr Clougherty wants to limit (b) to companies and leave the self-employed and partnerships to claim capital allowances (where they are available as they do not apply to all types of capital expenditure).  It is probably because long-term Mr Clougherty thinks that companies should not be taxed at all.  He thinks that dividends should be taxed on the shareholder, but the company should be a sort of tax haven, with money becoming taxable only when it leaves that tax haven.  He thinks that in his ideal world, companies would invest the profits in the business.  Of course, in the current real world most do not do so; they build up a cash pile.  It is also unclear why companies should be exempted from tax (yes, I am aware of the economic theory, but I am talking of the real world).

 

I assume that Mr Clougherty is either trying to fool Jeremy Hunt into thinking that he can raise enough tax from (d) to pay for (a) to (c), or he genuinely believes that.  So, let’s look at the VAT threshold.  The first point to make is that it is a de minimis exclusion.  If your turnover is £85,001, you pay VAT on £85,001, not merely on the £1 excess.  Accordingly, reducing the threshold will affect only those with a turnover of between £40,000 and £85,000.  Furthermore, if your turnover is below £85,000, you can already voluntarily register for VAT.  Many, if not most, businesses whose customers are other businesses register voluntarily, either to recover input VAT or because they do not want their customers to know that they have such a low turnover.  Furthermore, if a business that is not VAT-registered mainly supplies other businesses, requiring it to register produces no extra tax because the VAT it has to pay simply reduces the amount currently payable by its customers.

 

So, the people that Mr Clougherty wants to tax so those earning over £150,000 p.a. do not have to pay an extra 5p tax on the excess over that figure are people with income (before deducting expenses) of between £40,000 and £85,000 who deal only with individuals, i.e. you and me (or only with charities).  Who generates such modest income but has only a small amount of purchases or expenses?  Possibly your plumber or electrician and the guy who cleans your guttering.  I find it hard to think of anyone else in that £40,000 plus of gross income category.

 

So, do you agree with the proposition that you should pay extra for your electrical or plumbing repairs so that those earning over £150,000 p.a. (that’s the top 1% of all earners or about 320,000 people) can pay less tax?  I don’t!

 

It is in any event not at all clear that a country’s position in the International Tax Competitiveness Index correlates to growth.  I Googled Estonia and Growth.  Estonia’s GDP growth rate for 2021 was 8.35%.  This was less than Ireland’s (No 35 in the index, 9 places below the UK) at 13.48% and not a lot greater than the UK’s at 7.44%.  A separate table of GDP per capita, which may be more representative of growth, showed Estonia at $27,281, well below the UK (at $47,334) and far below countries such as Switzerland (4^th in the Competitiveness Index), Luxembourg (6^th in the Competitiveness Index), Australia (11^th in the Competitiveness Index) and the US (22^nd in the Competitiveness Index).

 

 

It is also interesting to examine the Competitiveness Index in more depth.  The UK actually ranked 1^st in Cross-Border tax rules, which is probably the most important factor for overseas companies wanting to set up in Europe.  Its overall ranking was depressed by consumption taxes in which it ranked 34^th out of 38 (even though Mr Clougherty wants to increase them further), and property taxes (again ranked 34^th because the UK chooses to finance local government by means of council tax and business rates rather than a far more complex local income tax).  The UK came a respectable 10^th in corporate tax as compared with the USA’s 22^nd.  The US high overall corporate tax rates (in the region of 30%) did not stop it ranking 22^nd overall, although mainly because there are no federal consumption taxes and State sales taxes are relatively low.

 

This all suggests that the Competitiveness Index is actually of little help as an economic tool.  But that is unsurprising because it does not claim to be one!

 

ROBERT MAAS