Thoughts on politics and life from a liberal perspective

Sunday, 14 February 2010

1992 "Tax bombshell" scars go deep for Labour and Conservatives

As Stephen Glenn pointed out yesterday, both Labour and the Conservatives are apparently thinking about raising VAT to 20% after the election in order to help try to reduce the budget deficit. There was a quote in The Times saying:

Though Labour and the Tories have denied having any current plans to increase VAT, neither will rule it out and The Times understands a rise in the tax is being considered by both parties.

The problem with VAT rises is that they do not spread the pain evenly. They disproportionately affect people on lower incomes because it effectively increases the amount of tax they pay overall as a proportion of their income far more than on more wealthy people. However the tax is not as visible as income tax. People do not see it directly taken out of their salary and hence if it goes up, they will not be able to compare last month's pay slip with this month's and see the extra amount the government is taking. They don't feel it as keenly even though it still affects them. That is why governments raise these indirect taxes, because it is politically less painful to do so.

But to understand why income tax rises are considered to be so politically poisonous we have to go back to the 1992 general election campaign. During that campaign, the Conservatives ran this poster campaign based on their calculations of what the Labour manifesto and the promised income tax rises would mean for the average family:

The poster was widely credited with having had a big impact on the result. Some, including Tony Blair even think that it was Labour's tax promises and the very effective way that the Tories highlighted them that directly led to them losing that election. The scars of that loss run very deep within the Labour Party and it was these that led to Blair's iron conviction to do everything he possibly could to avoid raising income tax rates. The line has been softened slightly under Brown with the pledge to introduce a 50% rate of tax for those earning over £100,000 but this only affects a very small number of people. The idea of raising income tax rates for many is still considered politically suicidal by most senior politicians in the two largest parties.

So the result of this toxic legacy is that instead of going for the fairest and most transparent tax rises which would be solely based on ability to pay, they are instead thinking about the best way to sneak them in through the back door.

Nobody likes tax rises. Indeed I wish we were not in a position where we were having to contemplate them but hardly anybody thinks we can get through the next few years without them in some form. So given that, the least any prospective government can do is to pledge to introduce them in the most equitable and transparent way possible.

H/T to Conservative Home for the image used above

1 comment:

Mark Wadsworth said...

VAT is the sneakiest and most economically damaging tax. Notwithstanding that the main focus should be on spending cuts, the honest thing to do would be to introduce Land Value Tax, which relates perfectly to 'ability to pay' without discouraging economic activity.

"But what about the low-income widow in a mansion?" the crowd will shout. Well, she can sell her mansion, free up a shedload of money to live off and move into an average house, thus reducing her bill to however much it is that she wishes to and can afford to pay.

Problem solved.