A TV programme is coming up on Thursday evening in which I expect I will appear. It is a 90 minute film by Martin Durkin about the huge national debt that has piled up and his solution. He will be arguing against Big Government and he interviewed me about the NHS and about welfare and social housing. Apparently the film also includes interviews with four former Chancellors. I believe he also filmed in Hong Kong.
I wonder if Channel 4 knew what they were in for when they commissioned this film since these kind of arguments - presented at length - are not usually seen on British TV. If the channel knew what it was doing, then all credit to it. Maybe something really is changing in Britain. There was a time when most of the media elite would not contemplate giving airtime to such ideas.
Here is a link to the programme details.
One of the points about Capital Gains Tax that is well put in the video below is that when one earns money after tax, one has a choice. Either one can spend it straight away, or else one can save it to spend later. There is no good reason why the government should prefer you to spend it straight away. On the contrary, deferred consumption - otherwise known as saving - provides capital which promotes long term economic growth.
Capital gains tax is, in this sense, a tax on deferred consumption. It discriminates againts deferred consumption and in favour of current consumption. It is an anti-saving tax.
That is one reason why Hong Kong, for example, with no capital gains tax has a high savings and capital formation rate whereas Britain does not. This discouragement of saving and investment is, in turn, one of the reasons why the growth rate in Britain is so low.
There is one objection that can be made to this line of logic: namely that a proper capital gains tax only attempts to tax 'real' gains - in other words gains that add to the real value of the savings. That is why for many years, the tax was on the gains after allowing for inflation. The trouble with that system is that it is expensive and complicated both to administer (for the government) and to comply with (for the saver). It is thus a big deterrent to investment. Consequently even the Labour government came to prefer a taper, which is a bit easier, and then just a lower rate (simplest of all). This whole history and logic of what does and does not make sense in capital gains tax is being junked in a rushed political accommodation between the Conseratives and the Liberal Democrats.
Thanks to the IEA blog for bringing my attention to this video.
...the tax raised will not be as much as is expected. In the long term, as rich people leave Britain, it may even result in a lower tax take. What happens elsewhere? Let us take some of the countries where economic growth has been fastest. The capital gains tax rate in both Hong Kong and Singapore is zero.
Even in China, where the image of the late Chairman Mao, its former communist leader, is prominently placed on bank notes, the rate varies between 10 and 25 per cent. Does anyone really expect the people who are successful, taxpaying and job-creating to hang around in a country with a top rate of 50 per cent?
Even now there are plenty of tax exiles. Take Zug, the province of Switzerland which has particularly low tax rates, where property prices are high because of the influx of British financiers. And the chief executive of HSBC has made his base in Hong Kong. But this will not just affect the financiers. It will affect most of us.
The above is from an article I wrote for the Daily Express.
Postscript: See also this article by Richard Wellings.
Osborne was asked on Radio 5 Live whether he wanted to get rid of the new 5% stamp duty on homes sold for more than £1m. He treated this question as though he were a bomb disposal expert and this was a particularly dangerous explosive. He replied that his priority was to reduce the burden on the less well-off - I think he picked out the rise in National Insurance. He clearly did not want to appear to be anything so terrible as a defender of the rich.
This is the way the Tory party has now allowed itself to be boxed in. It has implicitly accepted the way of thinking of Labour, Liberal Democrats, the BBC and so on. It has given up promoting its own ideology. Margaret Thatcher, when she was Tory leader, might have also replied that the priority was to take taxes off the poor. But she would also have been keen to go on to say that the overall level of taxation on everyone - rich and poor - was far too high and that it was damaging to employment and economic growth. She would have lambasted socialists for thinking that taxing and spending were the way out of every problem whereas she believed in low taxes, free enterprise and thus economic growth.
One day the Tory party will have to start saying these things again, otherwise it is starting the argument with an arm behind its back.
Those who find the constant drip of anti-capitalism from most of the presenters on the BBC Radio 4 'Today programme' aggravating now have a more bearable alternative: Radio 5 Live, despite also coming from the BBC, generally has more open-minded presenters. Nicky Campbell is certainly not anti-capitalist and is able to ask questions which seem wholly beyond John Humphrys and Jim Naughtie on the Today Programme. True, there is a certain Left-wing bias to the questions of a chap called Bacon, but he is not usually around in the morning, I think.
Despite all the evidence, I still hope that one day the Today Programme might reform. In case the producers finally decide that the interviewers should sometimes ask questions from a free market viewpoint instead of always a Left-of-centre one, I offer some suggestions:
TO BE PUT OVER THE MIRRORS OF JOHN HUMPHRYS AND JIM NAUGHTIE
"Wouldn't this problem best be left to the market?"
"Government service + monopoly = bureaucracy + bad service + rationing. Which part of that do you disagree with, minister?"
"Since this government service has done so badly, does it make sense to throw more taxpayer's money at it?"
"Is it responsible to raise taxes when you know - or should know - that all taxes have bad unintended consequences?"
"We know what all this extra public spending will lead to don't we, minister: more waste of taxpayer's money, more index-linked pensions and early retirements, less productivity..."
"The government already taxes people whom it defines as being 'in poverty'. Is it morally right to add to those taxes?"
And here is a long one, especially for Jim:
"Since the government already taxes poor, elderly people, any further spending by government has to face a severe test: it has got to be more worthwhile than reducing the taxation of the poor. Your idea [for letting off fireworks/keeping an out-of-date car factory going etc etc] does not pass this test, does it minister?"
Further suggestions welcome.
I visited Dartmouth College in New Hampshire recently to give a talk about The Welfare State We're In. I was told by the professor of economics who invited me that he had told his students that my book illustrated one of the theories of Bastiat. I was painfully aware that my education had not actually included Frederic Bastiat. So I thought I had better quickly gather up an idea of what he said. Naturally I googled him and found the Wikipedia entry. This led me onto a Wikipedia entry specifically on his 'parable of the broken window'. I don't think this one relates to my book but it is a superb bit of argument. This section of the entry reproduces Bastiat's own words:
Have you ever witnessed the anger of the good shopkeeper, James Goodfellow, when his careless son happened to break a pane of glass? If you have been present at such a scene, you will most assuredly bear witness to the fact, that every one of the spectators, were there even thirty of them, by common consent apparently, offered the unfortunate owner this invariable consolation—"It is an ill wind that blows nobody good. Everybody must live, and what would become of the glaziers if panes of glass were never broken?"
Now, this form of condolence contains an entire theory, which it will be well to show up in this simple case, seeing that it is precisely the same as that which, unhappily, regulates the greater part of our economical institutions.
Suppose it cost six francs to repair the damage, and you say that the accident brings six francs to the glazier's trade—that it encourages that trade to the amount of six francs—I grant it; I have not a word to say against it; you reason justly. The glazier comes, performs his task, receives his six francs, rubs his hands, and, in his heart, blesses the careless child. All this is that which is seen.
But if, on the other hand, you come to the conclusion, as is too often the case, that it is a good thing to break windows, that it causes money to circulate, and that the encouragement of industry in general will be the result of it, you will oblige me to call out, "Stop there! Your theory is confined to that which is seen; it takes no account of that which is not seen."
It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way, which this accident has prevented.
The Wikipedia entry continues:
Fallacy of the argument
The fallacy of the onlookers' argument is that they considered only the benefits of purchasing a new window, but they ignored the cost to the shopkeeper. As the shopkeeper was forced to spend his money on a new window, he could not spend it on something else. For example, the shopkeeper might have preferred to spend the money on bread and shoes for himself (thus enriching the baker and cobbler), but now cannot because he must fix his window.
Thus, the child did not bring any net benefit to the town. Instead, he made the town poorer by at least the value of one window, if not more. His actions benefited the glazier, but at the expense not only of the shopkeeper, but the baker and cobbler as well.
Excellent. It is an argument worth remembering next time someone suggests that spending money on public works is, of itself, good for the economy. (Yes, someone is employed. But taxes are taken sooner or later from someone else to pay him. That someone else would otherwise have used the money to buy something else from a third party.)
It really is a pity they don't teach Bastiat in British schools. Then Gordon Brown might have read him. But then Gordon Brown thinks he can spend your money better than you can.
There are plenty of books on Bastiat. Here is one published by the Institute of Economic Affairs.
David Cameron's speech this morning was the most encouraging thing I have heard from the Conservative Party in a long time. He said that a public spending splurge now would result in higher taxes later. He noted that Japan had tried increases in public spending to get them out of a long economic malaise during the 1990s. It certainly did not work. The economy grew at less than one per cent a year.
He noted that already Britain could only borrow at a premium rate compared to other countries. If the government tried to borrow even more than it has already, we would find it even more difficult to borrow and at higher interest rates. We could damage confidence and thus damage investment. In such ways, extra spending could actually reduce economic growth rather than increasing it.
He emphasised his long-established policy of keeping the growth in government spending over the cycle below the growth of the economy, thus gradually reducing the debt and the tax rates of Britain and creating a more prosperous society.
It was a speech so sound that it could have come from the days of Margaret Thatcher. Rejoice!
...and here is an article by George Osborne which was similarly welcome.
Last night I was a speaker in an Intelligence Squared debate on the motion "Tax the rich (more)". It can be heard on the Spectator magazine website here.
I, of course, was against the motion. Our side won easily and gained many more of the 'don't knows' than the other side. Our case was given great assistance by the data. According to a detailed study by the Institute for Fiscal Studies earlier this year, if you taxed the rich more, there is a good chance that you would reduce the proportion of tax revenue which they pay. It was pretty difficult for the pro-tax side to argue with that. Polly Toynbee chose to ignore the point entirely in her speech and then later said "It's just not true!" without supplying any evidence.
The background to the paradoxical fact that taxing the rich less, induces them to pay more money is the simple history of the past 30 years. In 1978/79 when the top tax rate was 83%, the richest one per cent of the population contributed 11% of the income tax paid. The top rate was then reduced to 60% in the following year. The investment income surcharge of 15% was abolished in 1984 and then the top tax rate was brought down to 40% in, if I remember rightly, 1988/89.
The innocent would have assumed that this would lead to a massive reducation in tax contributed by the rich. In fact, by 2001/02, the contribution of the richest had doubled - yes, doubled - to 22%. If you were to increase the tax rates on the rich, all the evidence suggests you would be in great danger or reversing this benign process.
Kelvin MacKenzie gave by far the most outrageous and amusing speech which made the evening entertaining as well as interesting.
In my speech I referred to a study published by the Institute for Fiscal Studies. This suggested that the marginal rate at which the richest one per cent are taxed is currently 53% (this includes indirect taxes). It further suggested that the rate at which the treasury could extract the largest amount from these people was 56.6% or 40% or 49% depending on different ways of analysing the data. The paper commented on the latter two estimates, "...both these estimates imply that cuts in the Marginal Effective Tax Rate facing the richest 1% would actually increase revenues".
The paper can be accessed on the IFS website at http://www.ifs.org.uk/mirrleesreview/press_docs/rates.pdf .
With the news that many more people will be liable for inheritance tax than previously and more people are now paying the top rate of income tax, I enjoyed Richard Littlejohn's take on it in the Daily Mail:
Gordon Brown has been comparing himself to Churchill (as well as Gandhi).
I look forward to his first prime ministerial broadcast. "We shall tax on the beaches, tax on the landing grounds, we shall tax in the fields and in the streets.
"Never in the field of human taxation, has so much been owed by so many.
"I have nothing to offer but tax, tax and more tax."
The Cameron leadership of the Conservative Party has given up on the tax argument at a time when it is getting increasingly strong and important.
This from today's Daily Telegraph:
Britain's ballooning public sector will grow bigger than Germany's next year for the first time since the early 1970s.
The Organisation for Economic Co-operation and Development figures show public spending in the UK will overtake that of Germany in 2007. The crossover will be seen as the latest stage in Britain's transformation under Gordon Brown into a big government economy.
The OECD says state spending will hit 45.3pc of gross domestic product next year, compared with 45.1pc in Germany. The proportion of the economy accounted for by the Government has risen dramatically under Labour, from a low of 37.5pc of GDP in 2000. The gap will be wider in 2008 since Germany is reducing its public spending.
Britain's public spending remains far above that of other major economies including the US, where it will be 36.9pc of GDP next year, and Japan, where it will be 36.2pc. But it is far below France's state expenditure, which will be 53.5pc.
Corin Taylor, head of research at the TaxPayers' Alliance, said: "The OECD has given warning that Britain's rising tax burden and high public spending is out of step with international practice. Britain's economy will feel the pinch with businesses and jobs going overseas. The prudent course would be to get a grip on public spending and cut taxes now."
Peter Spencer, economic adviser to the Ernst & Young Item Club, said: "With public expenditure heading towards 45pc of GDP, the real worry is that a lot of that money is actually borrowing."
The OECD figures show the rise in the UK's tax burden over the next two years will be the fourth-biggest in the Western world.
Here is the list, as published in the Mail.
When Geoff Hurst scored the final, sensational goal in the 1966 world cup final, it felt great. But what made that year even better was that we were paying a great deal less tax than we are now.
One way of putting it is to say that, in 1966, people worked up until May 2nd to pay their tax and from then on, they worked for their own benefit. On the day when Nobby Stiles and Martin Peters exhausted themselves in pursuit of glory, every taxpayer had already enjoyed a long period of earning money for themselves and their families.
How things have changed. The world cup is nearly upon us and still we have not reached what has been christened 'Tax Freedom Day'. It will not come until tomorrow [saturday] according to the Adam Smith Institute, which works it out each year. That is more than a month later than it was 40 years ago.
Despite the rise in taxation, yesterday George Osborne, the Conservative Shadow Chancellor of the Exchequer, announced that at the time of the next election, Tory promises of tax cuts are "very unlikely to be on offer". He emphasised 'stability' and, though he talked of going in the 'direction' of tax reductions, it sounded about as determined as Tracey Temple's resistance to John Prescott.
Mr Osborne has meekly accepted the way in which Gordon Brown has increased taxation and now appears to think it is not such a bad thing. Astonishingly, he has moved Tory policy so far on this that he now finds even some people in the Labour party take a tougher line than he does.
Derek Scott, Tony Blair's own former economic adviser, has accused Gordon Brown of creating an economy in which 'excessive public spending, higher taxes and intrusive micromanagement are gradually taking their toll'.
Gisela Stuart MP, a former junior minister, said earlier this week that high taxes and and spending could lead to 'future stagnation'. She warned of complacency after years of apparent economic success.
She should know. Gisela Stuart was born in Velden, Germany. She has seen how her home country got complacent after years of apparent economic success and consequently lapsed into its current, long-lasting economic stagnation.
In 1966, Germany lost to England in the world cup final, but it was universally regarded as the easy winner in the race for economic prosperity after the devastation of the second world war. Its fabulous economic growth came in the wake of economic management by Ludwig Erhard. He believed in low regulation and low taxes. Erhard did away with price controls overnight. He was all for free enterprise and, as a result, Germany thrived. The people of Germany became far richer than the British.
Then Germany started taking its prosperity for granted and had a succession of Left-wing governments which increased taxes and regulations. At first there was little effect. But gradually, Germany began to slow down. Meanwhile in 1979, Britain elected Margaret Thatcher who set about doing the exact opposite. The British position was turned around. From being the sick man of Europe, Britain started to catch up again. Instead of us worrying about how we should copy France or Germany, those two countries began to admire this country, instead.
But now that era is over, too. Both countries have changed direction again. Gordon Brown has been increasing our taxes while, in Germany, they have been cutting back. We have now reached the point of cross-over, when German taxation is becoming lower than British as a proportion of the national economy.
The result is inevitable. Gradualy, British growth will tail off. The more that Mr Brown raises taxes, the slower our economy will develop. It is already starting. When Labour came to power, economic growth tended to be higher than most people expected and above that of the rest of Europe. Now there are few happy surprises and our performance no longer shines so brightly.
Most of us don't realise the full extent of how much we pay in tax. The standard tax rate of 22 per cent is only the tip of the iceberg. We also pay National Insurance, which has become a tax by another name. Many people who do pretty well in their careers are surprised how quickly they find themselves paying the top rate of tax of 40 per cent. The pay of all of us is reduced because the companies which employ us must pay corporation tax and other taxes. And when we spend our earnings, we have to pay VAT or other duties. Even when we die, some two million of us now have estates that would be liable to inheritance tax. Add all that up together and we get to the daunting figure of 42 per cent of the national economy disappearing in tax.
Tax dampens our incentives to work and create new businesses. It damages the profits of enterprises so they are less able to compete and invest.
Lower taxes are not just about you and I having a little more take-home pay. They are about the future prosperity of this country.
If only tax were much lower, as it was a century ago, the British would probably enjoy bigger personal incomes after tax than the citizens of any other major country in the world. That is an assertion based on an OECD estimate of the damaging effect which taxation has on growth.
As taxes slide upwards, this is no time for the Conservative Party to lose sight of the fact that tax levels are vitally important. The country is in increasing danger of getting used to the idea that heavy taxes are fine. They are not. They are the enemy not only of our own living standards, but those of our children and grandchildren.
This is the unedited version of the article that appears in today's Daily Express.
Ruth Kelly was on the Today programme this morning and asserted that, under Labour, social justice had advanced. How does Ruth Kelly define 'social justice'? How does she measure it? The concept seems extremely vague. Does it mean giving more to the poor and taking more from the rich? So is the ultimate social justice when everyone has the same wealth? And does that not go by another name: communism? Has the concept of communism not been totally discredited by the vast and disastrous experiments in it during the 20th century?
It leads one to suspect that the phrase 'social justice' is a eumphemism for socialism or communism. And if it is not that, what is it?
Is it 'social justice' that:
The number of pensioners paying income tax has risen by 1.2 million under Labour, official figures reveal.
When Tony Blair entered No 10 in 1997 3.9 million men over 65 and women over 60 were in the tax net.
That figure has risen by a third to a record 5.1 million - nearly half the 11.1 Britons over state pension age, according to Government figures for the current tax year.
The Treasury put the rise down to the ageing population last night.
But the number of old age pensioners has only gone by 400,000 since 1997.
The above is from the Daily Mail.
Is the taxation of more old age pensioners a reflection of the greater 'social justice' in modern Britain? It remains the case, as I described in The Welfare State We're In, that the government defines a considerable number of people in this country as being in 'poverty'. It then taxes them. Many of these are pensioners. Rather more of them are now pensioners after Labour's rule. (I was glad to see the Tory spokesman Philip Hammond also making the point yesterday that the government taxes pensioners it defines as being in poverty.)
Incidentally, the Daily Mail is probably the most despised newspaper among the urban elite. But it keeps on picking up stories like this which tell us a great deal. It would be good to see some part of the BBC take this story on. The Today programme, for example.
A parliamentary answer published by the Government yesterday revealed that between 44 per cent and 51 per cent of pensioner households were eligible for the top-up credit in 2003-4.
That is from the Daily Mail today, reporting the answer to a question posed by Lord Oakeshott (who is very active on pension issues). The Mail also stated, though the source is not so clear: "Government figures show that only around 60 per cent of pensioners eligible for means-tested benefits receive them and some refuse to claim."
It is a double scandal. The first scandal is that a country whose wealth has multiplied over the past century has been so incompetent that nearly half its elderly are, to use the Victorian word, 'paupers' - that is in receipt of special handouts because they are so poor.
The second scandal is that the government should have chosen to give them money in a form which, it knows, many of them will not get. It seems from the above that 40 per cent is the figure. They have to fill in forms. Naturally the ones who are oldest, weakest, least able and perhaps poorest, too, will be the ones who are likely not to manage to fill in these forms. So the government knowingly runs a system which disadvantages the frailest members of society. It is obscene.
A third scandal is that the government also taxes many of these frail, old, poor people who do not manage to fill in these forms. It is true that there is a bigger personal tax allowance for older people. But elderly people can still be taxed when, according to the government's own ideas, they are in 'poverty'. I am referring here to income tax. But of course elderly people also face, disproportionately, council tax. They, like all of us, regularly pay VAT, too and fuel duty and so on. Then the government condescends to give them a little back. Only it doesn't because the process is too difficult for many of the elderly.
The full Daily Mail article does not appear to be online. But here is a previous article on the take-up of means-tested benefits by 'senior citizens'.
During the past five years, there has been a major deterioration in our financial position. We were running a remarkable financial surplus of 1.6 per cent of gross domestic product in 2000/01. Now, in the current year, the budget has descended into a deficit of three per cent.
Economic growth rolled along at a pretty good rate in the earlier years of Mr Brown's stewardship, but in the current year it has declined to only 1.75 per cent. Government spending has risen to more than 42 per cent of GDP and is now at or near the point where rising government expenditure will overtake the falling government expenditure of Germany. After years of falling unemployment, the jobless total is now rising.
It is not quite a crisis, but the numbers that - for the first half of Mr Brown's term - went well, have turned nasty. What is more, Mr Brown did not see any of this coming.
This is from the Daily Telegraph editorial today, to which I contributed.
Yesterday the government said it was not going to meet its targets for 'reducing child poverty'. I was asked onto the Jeremy Vine show on Radio 2 to debate with a Scottish MSP whether it was genuinely the case that real poverty still exists in Britain.
As is well known, the current definition of 'poverty' in Britain is a relative one, not an absolute one. People are said to be in poverty if they have less than 60 per cent of average income. If Bill Gates became a British citizen, average income would rise and therefore more people would have incomes below 60 per cent of the increased average. Therefore it would be said, by this government, that poverty had increased because Bill Gates had become a citizen.
This is clearly ridiculous. For a fuller discussion of this, see the afterword in 'The Welfare State We're In' on "Why do people talk more about 'poverty' now that there is less of it?"
But on this matter of differentials of income, my suspicion is that there is a natural tendency, as a capitalist economies grow, for a reduction of differentials. I suspect this happens even without re-distributive taxation.
Think of the enormous numbers of servants the very rich could afford in centuries gone by. Going back only as far as the late 19th century:
In 1891 Waddeson [Manor - owned by the members of the Rothschild family] had an indoor staff of 24 , with a further 24 coming in to work and at least 66 gardeners.
(This is from Waddesdon's 'Diary 2006' advertising events for this year.)
In other words, this one household had 114 employees. Compare this with the number of personal or household staff that someone like Richard Branson, Alan Sugar or even the Duke of Westminster has. I have little doubt that they have far fewer. And there were plenty of similar grand houses that existed in the late 19th century, many of which have been destroyed or turned into hotels or made into National Trust and other houses that people visit.
The large number of servants whom the rich could employ in former centuries reflected the enormous gulf between the wealth of the rich and that of the rest. It was surely far more dramatic than now.
Further evidence comes from the luxury in which the rich in developing countries often live. When I was in the Philippines in the early 1980s, I remember a chauffeur-driven Mercedes was sent to collect me when I went to have supper at the home of rich person. It is, I think, typically the case that the contrasts in developing countries are very dramatic. At the same time, it was said of Hong Kong that it had the highest number of Rolls Royces per capita of any country in the world (probably excluding Brunei, I suppose, where the Sultan had an astonishing number of them).
But then, as capitalist economies mature, the contrasts in wealth appear to become less extreme. You could argue that this is because of re-distributive taxation. It would be hard to disentangle the two possible causes. I wonder now whether Hong Kong, as somewhere which continues to have low taxation, has lower differences in wealth than it used to? If so, that would support my contention. If not...
At a lesson on Ancient Greece last week, Professor Robin Osborne was asked what were the main economic activities of the country in around the 5th century B.C. He mentioned silver mining and, of course, agriculture. But he also said that Greece was a trade centre and that there was a tax on imports and exports of only two per cent.
I wondered whether Greece, the foundation of European civilisation, was created by wealth resulting from relatively free trade and low taxation. He resisted the idea and mentioned the importance of good ship and cargo insurance systems for trade. But at the same time, he agreed he did not know what were the import and export tax rates in Spain or Egypt, for example.
He suggested that Greece was in a geographically advantageous position for trade. But I would have thought the same could be said for a number of other places, such as Malta and Sicily.
It is an intriguing thought: low taxationa and perhaps other circumstances favouring capitalist activity as the foundations of modern western civilisation.
Bank of America calculates that Britain's taxes will hit 42.4 per cent of GDP this year which will take it above the level in Germany for the first time in recent history.
Germany is expected to get down to 42.1 per cent. This is a big improvement of the 46.4 per cent in 1999.
Britain, meanwhile has deteriorated from only 40.4 per cent in 1999. This is reported in the Daily Mail today. (I have found no link to the article, unfortunately.)
It looks as though we are swinging back to a position in which we will underperform Germany again. That is what we did after the war, after British Governments opted for more and more socialism. Then came Thatcher and our economic potential improved dramatically. Now we are slipping back again. The British economy's performance over the past seven years was riding on the back of previous reforms together with unsustainable increases in personal and government debt. The party is now over.
Queues at petrol stations have started to appear. Hauliers are planning to blockade supplies, to stop Dover operating and to create a go-slow on the M4. The cost of a petrol is rising towards a £1 and we are thinking twice about whether we should make longer journeys because the cost of the petrol is beginning to hurt.
It may sound familiar. Is this going to be the petrol crisis of 2000 all over again?
At first blush, a great deal is different. Everyone accepts that the main driver for the soaring price of petrol this time is the rise in the international oil price, which has practically doubled compared to a year ago.
That is a change from five years ago when Gordon Brown got the lion's share of the blame because he was deliberatedly ratcheting up the tax on petrol each year. Since that is not the case now, support for proposed blockades appears to be weaker now. It also means that the hauliers they may not manage to cause such great disruption.
But people are losing money - not just hauliers but nurses on modest salaries driving to work in country hospitals and the self-employed travelling around as part of their business. It would be provoking to us all if the Chancellor just carries on complacently as though all this were nothing to do with him. Though he does not want us to realise it, he is caught at the centre of this problem.
He should remember that even in 2000, support for the disruption of supplies was not that fulsome. Only 56 per cent of people were behind further blockades according to one poll. But although people were not sure about the hauliers, they became convinced that the government was handling it badly. Disapproval of the leadership ran at the higher level of 72 per cent.
So while support for the hauliers may be more muted than before, anger with the government could still increase. It is a simple phenomenon: if anything goes badly wrong with the smooth running of the country, the government tends to lose popularity.
Anger with the government is likely to increase both because of the disruption and because we don't like paying so much for our petrol, especially as it comes just before we are going to have to pay for heating and lighting this winter. British Gas has already announced a price rise of 14 per cent.
The focus of annoyance is going to keep coming back to Mr Brown because he refuses to do anything to ease the pain. Worst of all, he is actually making money out of it.
The amount of revenue the government collected from North Sea Oil production last year was £5billion. This year, according to the UK Offshore Operators' Association, he is on course to take far more: £10billion. Even that estimate might be too low since it is based on an average price of of US$50 a gallon of crude oil. The price is currently much higher.
He is also making extra money out of VAT on every litre of petrol we buy at the pump. True, the amount he gets in petrol duty has not changed. It is a whopping 47.1p and that is what make the price of petrol in Britain among the highest in the world. But there is also VAT on petrol which has risen from 12.2p a year ago to 14.1p today. So 2p of the cost of each litre now is extra money which Gordon Brown is taking from compared to a year ago. If you fill up a tank with 45 litres, the extra money taken by Mr Brown is 90p. He is making a painfully high oil price even higher.
As more people realise this, they are going to demand that Mr Brown cuts back on his increased taxation of petrol - even if it is relatively short term. After all, the current sky-high oil price is not likely to last more than a year or two. At this price, all sorts of energy reserves around the world that were not worth exploiting before have become highly profitable. There is about to be a boom - especially in America and parts of the former Soviet Union - in oil, coal and gas development.
But Gordon Brown has another problem. One of the other differences between now and five years ago is that, in 2000, the economy was going pretty well and the government's finances were in good fettle. But he has used up both the good economic inheritance he got from the Tories and the sound financial position he gained from economic growth combined with tax increases. Mr Brown is therefore heading for increasing budget deficits and lower growth. He has not got so much room for manoeuvre. In his next budget, he was expected to raise taxes. He really needs the extra tax windfall that this higher oil price is bringing him.
He knows he is in trouble. That is why he tried to pre-empt discussion by saying he was not going to reduce the tax. He also has briefed newspapers that this is all an international problem and nothing to do with him. He has tried to re-direct attention away from himself by blaming the Organisation of Petroleum Exporting Countries for not increasing production more. While he is at it, he is also trying to make us believe that the recent oil price rise is as economically devastating as the one in the 1970s. That is simply not true and he is saying it - being one of the most calculating of politicians - because he wants this to be accepted as the reason why the economy is doing worse now than he predicted.
In the world Brown wants us to believe in, everything that goes right is because of him and everything that goes wrong is because of someone else.
But the hard truth is Mr Brown's record of economic growth is coming to an end and he is now just a tax-and-spend chancellor making money out of other people's petrol misery. He had better bend with the wind if he does not want the frustations and unhappiness of the moment to turn soon into bitterness directed at him.
(This is the unedited version of an article that appeared in the Daily Express today.)
If you tell a teenage girl that she may go anywhere she likes tonight except, say, the Blue Casablanca Club, you will immediately fascinate her. What, she will wonder, is so bad about the Blue Casablanca? What goes on there? Is it naughty but thrilling?
That is the effect the Treasury has had by blacking out the arguments for and against a radically different way of raising tax. The Treasury wrote a paper which was released under the Freedom of Information Act. But where there should have been a discussion about the merits of a 'Flat Tax', the text was missing. Nothing could have been better designed to intrigue us. What is the Treasury trying to stop us from considering? Is this, too, wild but exciting?
Apparently Gordon Brown himself did not do the censoring. But of course his officials know that a flat tax is the very opposite of his approach. A flat tax might even provide a solution to the problems he has created.
So what is it?
A flat tax is a single rate of income tax that applies to everybody. Typically the tax rate in countries where it has so far been tried has been between 16 and 26 per cent. A rate of 22 per cent has been suggested for Britain. A vital part of what could make it attractive is that it comes with a vastly bigger tax free allowance. In Britain, people start paying tax on any income over £4,895. With a flat tax, it has been proposed that the tax free allowance should leap to £10,000 or even £12,000. Another key aspect is that all sorts of tax allowances and deductions would be abolished. This would be a dramatically simpler system.
The idea has suddenly become fashionable, sweeping across Eastern Europe and beyond.
It started with Estonia which established a flat tax rate of 26 per cent. The little country is so pleased with the results that it is going to bring the rate down to 20 per cent. Lithuania, Latvia and Russia have joined the bandwageon, followed by Serbia, Ukraine and Slovakia. Poland intends to take it on.Greece might do too. Ireland is introducing a flat tax for companies. And - most significant of all - Angela Merkel, who is likely to become Germany's new leader in September, has employed a flat tax supporter as her economic advisor.
At first blush, the idea sounds like a charter for the rich. The top rate would fall from 40 per cent to, say, 22 per cent. But when you look at it more closely, you discover that the rich would not be the greatest beneficiaries. The poor would be.
They would be completely taken out of tax. Take a lone woman of 64 with income of only, say, £6,000. She is defined by the Government as being in 'poverty'. Yet at the same time, the government demands that she pays income tax. It is obscene. A flat tax would end this absurdity.
A research paper published by the Adam Smith Institute suggests that the benefit for the poorest ten per cent would amount to 9.2% of their income. All the biggest percentage gains would all be for those at the lower end of the income scale. They would pay no income tax at all or pay it on a much smaller part of their incomes.
This would also make it more worthwhile for low-earners to work. At present, those on Jobseekers Allowance or other out-of-work benefits have to compare carefully the money they get from the state with the cash they could earn after tax. But if there was no tax, the advantage of working would become clear as daylight. So more people would work which would mean a more productive economy, more income from tax and lower benefit pay-outs - a win-win-win situation.
The essence of what Gordon Brown has been doing over the past eight years has been to create all sorts of allowances and tax credits. One minute he is offering a concession to the elderly, then to low-income families with children and so on. But how much simpler it would be to offer low tax or no tax to all the less well-off. How much better that they should be able to avoid filling in one of Gordon Brown's forms. Many people - especially pensioners - cannot face the paperwork and feel humiliated asking for money. So they pay more tax than they should. The Government has imposed a system which it knows will penalise such people. A flat tax system would get rid of that.
Admittedly it would cost quite a lot of money. But the James Review identified savings of £35 billion that could be made by this wasteful government. And the economic growth and employment a flat tax would encourage would make the rest up before long.
Hong Kong has had a flat tax since 1947 and its economic success has been awesome. And a flat tax would, surprisingly, raise almost as much from the rich as the current rate. They would stop avoiding so much tax through deductions and evasion. More rich people would come to live in Britain, too.
Of course, a drawback for Gordon Brown would be be that he would not get to do all his economic micro-management. He would not be able to get favourable headlines by giving a hand-out to Paul while not mentioning that he was paying for it by robbing Peter.
No wonder Gordon Brown does not like the idea. But the rest of us should be seriously interested.
(This is the unedited version of an article which appears in the Daily Express today.)
Gordon Brown's poor record as chancellor is gradually becoming more obvious.
This week, more light fell on his bad policy of tax credits. But first a quick summary of the bad policies he has pursued:
1. He has raised tax heavily to pay for investment in a monopolistic healthcare system (adding to the problem by fighting any attempt to make it less monopolistic). The result: the country will be poorer than it would have been and people less well cared for when ill.
2. He took a pension system which was amongst the most successful and well provided for in Europe and has put it in crisis. Result: more people will be poor in old age.
3. He has increased the prevalence of means testing - with all its disadvantages (see The Welfare State We're In and previous postings. One of the results: reduced savings (which will, again, cause more people to be poor in old age).
4. He has dramatically increased red tape, waste and errors through complicated systems - such as tax credits - instead of using much simpler methods (such as higher thresholds for tax-free income). By wasting public money, he has made us poorer. Through red tape he has cost us money again and wasted our time.
Here is some of the coverage of the problems Mr Brown created through tax credits:
Hundreds of thousands of families have suffered because of flaws in Gordon Brown's £13 billion system of tax credits, a watchdog says today.
Ann Abraham, the Parliamentary and Health Service Ombudsman, says poor families are particularly vulnerable because of the way they have been forced to pay back money given to them in error.
In a hard-hitting report, she says that, without reforms to the system, "a sizeable group of families will continue to suffer not only considerable inconvenience, but also significant worry and distress".
She urges ministers to reconsider the way the Government pays tax credits, which are claimed by around six million families.
She also accuses the Treasury of misleading MPs about the extent of the problems and calls for claimants to be allowed to keep overpayments received as a result of error. The ombudsman's findings, which are echoed in a separate report today from the charity Citizens Advice, are an embarrassment to the Chancellor, who considers tax credits to be one of his major achievements.
The full article is in the Telegraph.
Polly Toynbee, in the Guardian, rode to the defence of tax credits although in the process she was good enough to lay bare more about how disastrous they have been:
If the sums involved are eye-wateringly huge - £2bn overpaid - that is because more families are getting these payments and the money they receive is far more generous than ever before. Even so, it takes the breath away to find that out of the 6 million families getting tax credits, almost 2 million have been overpaid by an average of £1,000 each.
For Ms Toynbee, it is a regrettable side issue that two million overpayments have been made. For her, the point is how generous Mr Brown has been and how clever he is politically to help the poor, despite the fact that - so she claims - the electorate does not like this.
She claims, incidentally, that there is no higher incidence of computer systems going wrong in the private sector than in the public sector. I wonder what evidence she has for that, assuming she has some? But in any case, should not prudent government policy allow for the fact that public sector computer systems, at least, tend to go wrong (and way over budget)? Would it not be sensible to make policies, where possible, that do not heavily depend on them?
But the major failing of her piece is the failure to consider much simpler (and thus less accident-prone) approaches such as introducing a high threshold for tax free income. Tax credits are generally repayments of tax paid. It is far simpler not to take the tax in the first place.
A second failing in her piece is to ignore the fact that many of the poorest and least able do not claim their tax credits. It is just too difficult. So they are not helped at all.
Today, Polly Toynbee has been reminded that her great admiration for tax credits is not shared by, er,
The Guardian was the first newspaper to reveal the tax credit system was in trouble and Jobs & Money has campaigned tirelessly for two years for the Inland Revenue officials to take a more lenient stance on repayments.
Last year, under the headline "Don't make it easy for the taxman" we told how Citizens Advice was advising claimants to check their records before agreeing to make overpayments. Given the official reports detailing how Inland Revenue systems make thousands of errors a month, it turned out be sound advice.
In the spring we offered further tips on how to appeal if the Revenue had begun to claw back overpayments ("Tax credit victims in fightback") and reported on calls by MPs for ministers to tackle the "tax credit shambles".
It would be a further two months before Dawn Primarolo, the minister in charge would concede to conducting a limited review. Calls for her resignation this week were rebuffed by the government.
The government has resisted calls for an overhaul of the tax credits system ever since it was launched in 2003 amid chaos and confusion.
Ms Primarolo ordered a limited review last month, but this week's critical reports have failed to persuade her the system is flawed.
She has also ignored calls by charities representing low income families, MPs and civil service unions, which have campaigned for a moratorium on demands for tax credits to be repaid until basic defects in the system are investigated.
"Chaos", "confusion", "shambles"? Not a problem for Polly.
If you own property, the government is on your tail. The idea of increasing taxes on property has been building up for several years. Now the election is out of the way - and there is a big government budget deficit to fix - it won't be long now.
Ministers are bursting with ideas and are asking others to come up with more. A government policy document proposes that council tax in Northern Ireland should be based on home values. The idea could be tried out there and then applied nationwide.
If ministers don't go for that one, they will get suggestions from a review of council tax by Sir Michael Lyons later this year. He is likely to recommend changes to council tax which will result in many people paying more.
Don't let us forget second homes. Next month a 'rural housing commission' will start looking for ways in which to hurt those with a place in town and a hideaway in the country. This could be done through planning restrictions or by raising council tax for second home owners. Yvette Cooper, a minister in John Prescott's department, has said it might be a good idea to tax second home owners because this could make more homes affordable for local people. As ever, the government is keen to blame problems on other people. The real reason property is expensive is that we have a rising population (partly through immigration), more people living alone because of family breakdown and very restrictive planning laws. The result is inevitable and not the fault of second home owners.
Gordon Brown has already got 'form' on taxing property. He has increased the rate of stamp duty several times since he became chancellor and he has kept the increases in stamp duty thresholds - the point at which the higher rates apply - far below the increases in house prices. The top rate of stamp duty is now four per cent and many people who once thought the higher rates would never affect them are finding they are getting close to them.
Mr Brown also increasingly taxes property when people die. As with stamp duty, he has raised the inheritance tax threshold as slowly as possible. As property prices have risen, there are millions of people alive today who will not be able to leave their homes to their children, free and clear. They will be forced to leave up to forty per cent of the value to Gordon Brown.
Why does Labour government have it in for property?
One reason is grubbily political. Property taxes genrally raise money without hitting Labour's supporters in areas where property prices are relatively low. In Scotland and the North of England, some 60 per cent of property purchases do not attract stamp duty at all. That compares with only 13 per cent in the South East and less than five per cent in London. Similarly less than 10 per cent of purchases in Scotland, the North, the North-West, Yorkshire and Humberside and Wales attract the the three per cent or four per cent bands of stamp duty. In contrast, the higher rates are paid in close to 40 per cent of purchases in London. Stamp duty is a tax on the south and on Conservative Party supporters.
Gordon Brown has also got Left-wing theorists egging him on towards higher property taxation too. The Institute for Public Policy Research has called on the government to “reduce the under-taxation of home ownership” arguing that more tax would reduce the gap between the homes lived in by the rich and those of the poor. Another argument in favour of hitting home owners is the suggestion that, Britain has "too much owner" occupation and is "out of line" with the lower levels on the Continent.
Is it right that our property should be taxed more? Is it a 'good thing' we would be selfish to oppose?
Actually a high rate of home ownership is a positive thing. People look after their own homes better than, say, homes belonging to a council. The total destruction of many council estates over the years - both in Britain and abroad - is testament to this fact. The reason home ownership is less widespread in many Continental countries is probably because they have taxed it so heavily. Some Continental countries have made it disastrously expensive to buy and sell houses. The rules are far from simple but in France, for example, stamp duty is between 10 and 12 per cent for properties older than five years. In Italy the rate is 11 per cent. So what happens? People don't buy and sell. They rent, not through choice but because the government pushes them that way. These countries have made a mistake. They should change, not us.
Labour is missing the most profound point about property. A house or flat may seem to be just a piece of land with some bricks - a good target for taxation. But to each of us as individuals, an owned home is profoundly important. It is somewhere we can go to whenever we want and for as long as we want. It is financial security. Even if we lose our jobs or our shares go down, we feel that we will still own something if we own our home. And it will very probably keep, or increase, its value.
A house or flat is a way in which we try to improve our circumstances. We typically start off in a small place. But we hope to save, get promotion or an inheritance and then move on to something better. The desire to take ourselves and our families to better things is a natural part of human behaviour. It benefits ourselves, our families and the national economy.
These are things Tony Blair appeared to understand before he became prime minister. When out canvassing for votes, he met 'Sierra Man' polishing his car - the sort of person who had done well out of Lady Thatcher's years. Sierra Man had bought his council house and had been able to get his car because of lower taxes. 'Sierra Man' had 'got on' with the aid of property ownership and low taxes. It was because Mr Blair saw the importance of this that he got his landslide.
Unfortunately Tony Blair has not been in charge of the taxing and spending of this government. Gordon Brown has. What is more, he is likely to get the top job in the next few years. He subscribes to the idea that taxing property is good. So look out, home owners, you are first in line for the coming rise in taxes.
(This is an unedited version of an article that appeared in the Daily Express today.)
There used to be a time when being middle class meant you had worked hard and done well. You established your financial independence and achieved what Tony Blair would like more of : some respect.
But now it seems to be a different matter. The middle class seems more and more put upon.
The latest example comes from the government commission on pensions which has come up with the bright idea that people who go to university - typically from the middle class - should have a later retirement age than everyone else. They would be expected to work an extra five years before getting a state pension. Meanwhile the government has announced a new scheme to use taxpayers' money - raised largely from the middle class, of course - for the state to part-own properties alongside first-time buyers.
Being middle class is still preferable, of course, to being poor. But one has an increasing sense of life becoming more difficult for its members. It starts from early in life.
Yobbery among the young has increased and - despite its claims to the contrary - the government has a policy of discouraging the expulsion of disruptive children. So at schools, middle class children, too, are more likely to be bullied and have their study disrupted.
Those who make the sacrifices to pay for full-time private education have long had to pay for education twice: once through their taxes and again through their fees. Now the government, in the Queen's Speech, has revived a plan to make them pay a third time, by forcing private schools to do more charitable work or else be taxed more heavily.
We grow up and get a job. Before we know it, we are paying a third of our income in tax and national insurance. If, in our efforts to get on, we succeed in earning more than £36,000, we are quickly into the top rate of tax. More people pay the top rate now than ever before.
The next step could be to buy a car. That's fine except that the tax on petrol is so high that a litre is not far short of a £1. Oh, and the Labour Government virtually stopped improving roads when it came to power in 1997, so they are more jams than before. The car - as Tony Blair once recognised - is the modern symbol of middle class life and it has come up against an anti-car culture, wholly in contrast with that in France or America.
Many of us then get married and have children. It is a quaint old tradition that survives among the middle class. Unfortunately the tax system is now loaded against you if you would like to split your roles with, say, the wife looking after childen and home and the husband going out to work. There is no married couples allowance or children's tax allowance any more. After the second world war a married man on average earnings with a wife looking after their two childen paid no income tax at all. Now they pay plenty.
At least we all have far more holidays than we used to. Unfortunately, the Euro has been strong in the last few years so holidays in Europe are pretty expensive. And it is not exactly cheap if we stay at home, either. A recent survey suggested that London is the second most expensive city in the world in which to live.
Still, we plough on. At least the middle class does not get the worst of rising crime, although we endure an increasing amount of rudeness and theft. There comes a point where we begin to think more about saving for a pension. Unfortunately we find that Gordon Brown has been thinking about pensions, too, and has been taxing them. Mr Brown has introduced an anti-savings tendency in government - a direct hit at the middle class. And if that was not bad enough, the stockmarket, into which most pension money is invested, has performed miserably since 1997.
Some of the middle class are doctors, teachers and policemen. They increasingly find that their role in life is being told what to do. Their independence and judgement have been replaced with instructions. And then, when the government-dominated system fails, who gets the blame? The government points the finger at precisely these middle class professionals whom it has disempowered.
Other members of the middle class run their own businesses. If they do well, they want to employ more people. That's a pity because there is a big tax on employment called employer's national insurance. Then they have to comply with a massive raft of laws. They must master the terrible complexities of the working tax credit, comply with the new religion of health 'n' safety and be ready to defend themselves in court if they have the temerity to sack anyone.
Even when we die - and probably would like to pass on our hard-won assets to our children - we are obliged to hand over 40 per cent of anything over £275,000 to that non-relative of ours, Mr Brown.
We keep going, but it seems like an uphill struggle. It feels as though the government does not want us to succeed and, instead, is piling extra weights on our backs.
All of which may explain the rising emigration from Britain. A record 191,000 Britons packed up and left last year. That was more than fifty per cent more than in 1994. The number going to Australia has doubled in the past two years.
Has the increasing burden on the middle class at least done some good to the rest of society? Have the poor benefited? Sadly, even that does not seem to be the case. The poor are almost as highly taxed as the middle class - mostly through indirect taxes. On top of that, they get the worst of state education and medical care.
So it is all for nothing. Being a member of the British middle class is still better than most fates. But it is no longer the great privilege it once used to be.
(This is an unedited version of an article that appears in today's Daily Express. The surprise in the research I did for it was the major rise in the rate of emigration. 125,000 Britons left the country in 1994. 191,000 left in 2003.)
A lot of women now work incredibly hard. The interesting question is whether this has something to do with policy changes made by governments.
Forget all the talk about a 48-hour working week: most mothers in Britain put in at least 100 hours and form the "hardest-working profession in Europe", according to a report today.
Business leaders may scoff at the idea that doing the laundry, the school run and vacuuming constitutes "work", but most mothers would disagree, pointing out that such labour is often physical, relentless, goes unnoticed and is certainly unpaid. Many also combine it with part-time paid work.
Research among 1,035 mothers found that for nearly 40 per cent of them, the day did not end until 9pm on a regular basis, and a third slept fewer than six hours a night.
For those in London, seven hours a week was devoted to the school run alone.
The research comes as a book on the stresses of motherhood, Perfect Madness: Motherhood in the Age of Anxiety, says women are living lives of silent desperation, trying to be supermums by looking after the children, keeping the home spotless and securing places for their children at the right school.
Here is one possible contributor to the phenomenon of the phenomenally hard-working mother: the tax system now favours two people in a couple working rather than one.
It used to be the other way round. It used to be that a married woman with children working part-time (which is very widespread now) would be taxed at the top rate of income tax incurred by her husband. In those days when the top rate of income tax was 83 per cent, that meant it was pretty much a waste of effort for the wife of a wealthy man to take a job. It was also not very remunerative for those with husbands on any above-average income.
Then Nigel Lawson introduced separate taxation. This was supposed to provide equality of treatment for women. But did it in fact contribute to the way that women now work incredibly hard?
He gave each member of a married couple a separate personal tax allowance and in each case, the rate of tax would rise first to the standard rate and only later to the top rate. So if, say, a husband and wife both earned £30,000, their combined income of £60,000 would mostly be taxed at the standard rate and over £9,000 of it would not be taxed at all. Whereas, currently, if all of it were earned by the husband, half of it would be taxed at the top rate and the tax free personal allowance would only be about £4,500 (or whatever the personal alowance has now reached).
Whereas before, for given combined family income, the tax advantage lay with only one of the two going out to work. Now the tax advantage lies with both of them having a job.
It might be better, perhaps, to go for something which - from memory - David Willetts suggested some years ago: a transferable personal allowance. A woman (or man) would be able to say to the inland revenue, 'I prefer to stay at home to look after the children and the home. I hereby transfer my personal allowance to my husband (or wife)'.
That would not entirely remove the tax disadvantage suffered by one-earner couples, but it would reduce it. In the process, it would allow many women the opportunity - but certainly not any compulsion - to stay at home looking after children and home if that is what they would prefer.
(The research that revealed the 100-hour working week of most mothers was commissioned by Comfort, manufacturers of fabric conditioner, but unfortunately the Daily Telegraph article on this does not say which organisation carried out the research.)
How much have the poor been taxed under Gordon Brown (see also posting below)? He portrays himself as a great friend to the poor and has created complicated tax credits to help them. How big has that help been?
I have just been directed to some figures published by Reform which were based on the Government's publication, Economic Trends.
In 1997/98, those people in the bottom income quintile had a very susbstantial 39.2 per cent of their income removed in tax. But after five years of the generosity of Mr Brown, in 2002/03, how much was removed? 39.0 per cent. So the poorest gained 0.2 per cent of their incomes. That was less than the average gain of the other four quintiles.
The figures include National Insurance but not, I believe, the taxation of dividends within pension funds. In any case, the figures suggest that Mr Brown's self-praise over his treatment of the poor is much exaggerated.
It also suggests that the bulk of his tax-raising has been focused elsewhere.
How, one might wonder, does he manage to extract such a large proportion of the incomes of the poor? Through indirect taxation -VAT, duties on cigarettes, alcohol, petrol and so on. These are taxes which the Labour Party used to decry as 'regressive' because they take up a higher proportion of the incomes of the poor than the rich. But now that Mr Brown relies on these 'regressive' taxes to remove income from the poor, the Labour Party seems to find nothing objectionable about them at all.
An extra half million people will be liable to income tax as a result of Mr Brown's budget last month (according to Revenue and Customs estimates reported in the Daily Mail). That is because, as usual, Mr Brown did not increase the tax-free personal allowance with earnings.
During his time in office, the numbers liable to income tax will have jumped by 4.7 million. In the final year of the Tories, 25.7 million were liable to income tax. Next year, 30.5 million are expected to be liable according to the government.
Mr Brown talks about the poor and talks up his tax credits. It is true that many of the people who are liable to income tax will claim tax credits, but not all - either because they are not entitled to them or they fail to claim them. It is simple fact that Mr Brown has made millions more poor people liable to income tax.
As Gordon Brown has remarked, it is impossible to believe a word that Mr Blair says. He is going into this election with the knowledge that he will raise National Insurance, or other taxes, afterwards. But he won't admit it.
This is from the BBC online coverage of tonight's interview with Mr Blair by Jeremy Paxman:
...he was not about to confess to having misled voters about his intentions on taxation at the last election.
Four years ago, in a similar interview, he had rejected Mr Paxman's suggestion that it was clear from all he had said that he would raise National Insurance contributions if he was re-elected. (Which is what happened. JB)
There is another well-rehearsed answer to this one - he was only led to increase NICs after a post-election report indicated such levels of extra spending were necessary for the health service. (Surely nobody believes that.JB)
So couldn't he do the same again, if he wins a third time, when, for example, the Turner report into the pensions black hole is delivered.
He was not about to be drawn into mapping out budgets at this point, he declared.
From the Adam Smith Institute
TAX FREEDOM DAY HAS COME. Well, at least in the United States, where it occurred last week. Thanks to the Bush tax cuts, Tax Freedom Day this year was 18 days earlier than it was in 2000, under Clinton.
The Institute of Fiscal Studies has now established that average incomes fell in 2003/04 because Gordon Brown took so much more of our money in income tax and national insurance. We obtained higher salaries, but Gordon Brown more than wiped out the benefit.
Gordon Brown did not only increase our taxes in that one year of 2003/04. He has increased our taxes in most of the years he has been in office. They have been slipped in so that they don't get noticed on budget day.
Where would we be if Gordon Brown had never existed? Let us just imagine for a moment that Labour did not come to power in 1997 or, at least, that Labour kept to what Tony Blair told the Financial Times that year: "we have no plans to increase taxes". How much better off would we, as individuals, be if Gordon Brown had kept to that?
It is true that early on he halved the starting rate of income tax and reduced the basic rate by one per cent. But this has been cancelled out by the fact that he makes us pay income tax on a bigger a proportion of the money we earn. At present, most of us pay tax on every pound above £4,745. It is called the 'tax threshold'. If this had been increased in line with earnings since Mr Brown's first year as Chancellor, it would now be considerably higher, at about £5,384. So we pay tax on £640 of our earnings that we would not have done, if Gordon Brown had never existed.
The most fortunate, high-earning ones among us now pay tax at the top rate of 40 per cent on every pound above £36,146. They include people like senior policemen, doctors and head teachers. Where would they be if Gordon Brown had never existed? They would not be paying the top rate of tax at all unless they earn over £40,120. Someone earning that sum or more, pays top rate tax on an extra £3,974 because of Gordon Brown's eight years.
National insurance is now levied at 11 per cent whereas it would only be 10 per cent, if Gordon Brown had not increased it. And there would be no special one per cent national insurance levied on those who earn above the upper limit. Someone on the average income of £21,900 pays an extra £136.
Mr Brown has also increased the taxes we pay when we spend our money. The duty on a packet of cigarettes has soared under his rule. If it had risen in line with earnings, it would be £3.00. But as result of his increases, it has risen to a whopping £3.85. Someone who smokes 10 a day, pays an extra £155 a year in duty than would be the case without Gordon Brown.
If we decide to move house, he gets us again. If stamp duty had been increased in line with house prices, it would only be payable on houses and flats worth over £143,000. For seven long years, Mr Brown kept the threshold down at £60,000 and only, now, just before the election, has he increased the threshold to £120,000. That still means that someone buying a modest new home for, say, £140,000 pays £1,400 more than would have been the case if Mr Brown had not been in charge. Someone buying something bigger faces a much heftier bill because of the new, higher rates. Someone paying £260,000 for a place to live, pays £7,800, whereas he or she would have paid only £2,600, if Mr Brown had not had his way.
And so the list goes on. It would be a big exercise to take in all the increases including easy-to-overlook measures such as the increase in duty on insurance policies. One of the biggest levies has been the £5 billion a year tax on pension funds. That was a clever - or rather a cynical - move. We don't much notice it during our working lives. It will only be when we retire that we might, perhaps, recall that it was because of Gordon Brown we can't afford to be a member of a golf club or go to the theatre as before.
Even when we die, our inheritors will be worse off . The inheritance tax threshold now is £263,000. But if it had been increased in line with house prices, it would be vastly higher at £512,000. That means tax of nearly £100,000 payable on an estate of that higher amount, because of Mr Brown's presence.
Mr Brown could argue that it has all been in a good cause. It has been spent to bring state education and the NHS up to new high standards. There may indeed have been some modest improvement in the NHS although it is probably still the least effective medical system in the advanced world. Independent analysis of reading ability suggests that there has been precious little improvement in education.
Independent analysts reckon that there is more tax to come, too. The Institute for Fiscal Studies says an extra £11 billion will have to be raised after the next election - equivalent to 3.5p on income tax.
On Mr Brown's side, you can say that he has given money back in the form of tax credits. But the tax credits only go to those people he had chosen to select. Generally they do not go to people without children below pensionable age. They also have to be applied for and many people - often the poorest and most vulnerable - fail to go through the form-filling required.
More than half of pensioners are now entitled to means-tested benefits. He has gradually been turning us into a nation of supplicants, applying to him to get back a little of the money we have previously paid. He is creating dependancy Britain which, he hopes, will vote for his party to keep the payments flowing.
We would not just be richer, we would have more dignity and independence, if Gordon Brown had never existed.
An edited version of the above appeared in the Daily Express today. One major area of tax increases I failed to mention was council tax, which, according to estimates by the Conservatives, has risen on average by over 70 per cent since Labour came to power.
I was greatly helped in my research for the article by Corin Taylor of Reform. On a quick reading, it might not be obvious what calculations are necessary to bring out the figures that we did. Corin found out what the rates of tax were in 1997/98 and then the increase in average earnings between then and 2003/04. I then made a bold assumption about what the increase has been from then until 2004/05. We were thus able to work out what the thresholds and the tax would have been "if Gordon Brown had never existed".
One thing became clear during this exercise. That someone on average earnings is not in a very diferent position than he or she would have been without Gordon Brown. The money he has raised since 1997 has come from elsewhere - from the pension raid, from stamp duty, council tax and so on. Since so much of the tax is indirect tax, it might be a useful to look further at how his taxes have affected the poor. I am not sure that the Institute for Fiscal Studies has looked at this. It normally concentrates on taxes on income. It is worthy of further research and if anyone knows of work that has been done on this, I would be glad to hear of it.
The Reform website is here. It is well worth signing up to be emailed the excellent daily media review.
Lunch with a senior official of the Hong Kong government. Hong Kong still has a relatively low burden of government, but the weight has got a lot heavier since John Cowperthwaite's day. (Cowperthwaite is the hero of the chapter on tax and growth in The Welfare State We're In). Whereas government activity used to account for 14 per cent of gross national product. It is now up to 22 per cent. Of course, that is still miles better than our 40 per cent and rising.
The official admitted that the big rises in spending happened in 1993-1996, when Chris Patten, the Conservative politician, was there. Mr Patten played a strong political game in Hong Kong. But he was, of course, a British centrist. Under him, Hong Kong welfare state spending rose. It comes as no surprise that unemployment after Patten has been higher than it was before he arrived.
My lunch companion offered some other reasons apart from the Patten-effect why the Cowperthwaite inheritance was spoiled. With Chinese control imminent, the British were offering a bit of democracy and, in a democracy, of course, people are in favour of what they they perceive as 'free' benefits and services from the government. Also, times were good. The government was almost embarrassed by the amount of money it was raking in from property sales and so on. These three factors were a a bad mix (my view, not the official's): a British politician, a bit of democracy and rising prosperity.
Looking back, the big picture is that Hong Kong became prosperous through small-government and then, influenced by that very prosperity, started to give up small government. One measure of the success of the achievement of small government came when the official told me that a secretary in central London gets paid less than one in Hong Kong. And of course the London secretary has to pay much more tax.
Hong Kong retains a massive advantage over Britain in that the government role there is still small compared to what it is in Britain. At the same time, the Hong Kong government provides state schools, state hospitals and welfare benefits. How, I wondered, does it manage to do this for so much less money (as a percentage of GDP)than the British government?
Part of the explanation is that government-funded healthcare in Hong Kong only costs 2.7 per cent of GDP whereas in Britain the cost is in the region of 9.0 per cent. One reason for that big difference is that the Hong Kong government does not do much primary care. There are some government clinics. But the general practitioners are private. (This is not a great burden for patients since a visit to the GP only costs HK$120 (about £8). Seeing a private GP in London, in contrast, is about £60. But then the private GPs in London are aimed at the top of the market and offer plush premises in high-rent parts of town and leisurely consultations - so they are not exact equivalents. You could argue that the Hong Kong prices reveal how cheap GP consultations could be in a genuinely free market.)
Another possible explanation for the lower cost of the Hong Kong welfare state is that all the welfare benefits are means-tested and you do not need much in the way of 'means' to be disqualified. You will not qualify if you have more than about HK$50,000 (leaving aside your own property, if you have one). This is equivalent to only £3,400. Also the measurement of your means is 'family-based' not individual-based. So a young son at home with no money gets nothing if he is living with parents who have some savings. So, too, an elderly parent living with a high-earning son or daughter. On top of that, the welfare benefits are pretty low. I think HK$5,000 a month was mentioned, which is equivalent to only £340. So the benefits are low enough not to distort the behaviour of most people. (Although it must be mentioned that £340 goes further in Hong Kong. It apparently can buy you a place at a very basic old people's home.)
Because you are required to have very little in the way of 'means' and you only get a modest amount of benefits anyway if you qualify, only 15 per cent of people over 60 are on welfare benefits. This compares with virtually 100 per cent of people over 65 in Britain, since we have an insurance-based system in which everyone is required to be covered. The saving in Hongk Kong from this alone must be substantial.
But I got the impression that the Hong Kong government, at least, believes that its services are good and it is therefore seeking to provide more - in care for the elderly, for example. This is worrying. It is reminiscent of the early days after the second world war when it was thought, too, that the government was pretty good at education and healthcare. It was not appreciated that the hospitals and schools were benefiting from their inheritance as private and charitable institutions. Their deterioration took place through two processes: 1. Time and 2. Increasing state control. Both those processes are inevitable once the state has taken over the purse-strings. They will happen in Hong Kong. But it takes foresight for policymakers to realise that they will happen. Civil servants, like Cowperthwaite, can be capable of such long-term foresight. Politicians rarely are.
Already there are aspects of the social policy that have the potential, if they become more significant, to do social damage. It would be a pity if welfare benefits assessed on a family means test became valuable enough to influence families to encourage, for example, the grandparents to leave the family home. That kind of thing was reported both by George Orwell, in The Road to Wigan Pier, and in the 1834 Royal Commission report on the operation of the Poor Laws.
Hong Kong is still one of the few places where the welfare state has not been too pervasive and where, as a result, there has been a wonderful growth in prosperity and relatively little societal breakdown. But it is on a slippery slope.
Gordon Brown claimed in the budget that he was going to cut back the regulatory burden on business. I have visited two small businesses that were infuriated by the mound of extra work created by his tax credits. The idea of Mr Brown genuinely cutting any kind of burden of paperwork is grotesquely absurd. In Thursday's Daily Mail, Edward Heathcoat Amory did a superb job of demonstrating why Mr Brown is the last person to be believed when he claims he is going to do any cutting of regulation, waste or excessive paperwork.
This, after all, is the same Mr Brown who last year publiched the longest Finance Act ...in history, with 328 section and 42 schedules.
This is the same Mr Brown whose tax credits system has become a byword for complexity. His new pension credit....expects claimants, the elderly and the poor, to wade through a 16-page claim form and 18 pages of impenetrable notes.
This Mr Brown has also been a key member of the Labour government which has imposed a total extra regulatory cost on business, measured by the British Chamber of Commerce using the Government's own figures, of £40 billion since 1997.
That involved 23,222 new regulations - 15 for every working day.
...This is the Mr Brown whose ministerial colleagues have insisted that every horse in Britain must have a passport, that anyone wishing to replace a window must become a member of the Fensa (the Fenestration Self-Asessment Scheme), who won't let you change a light fitting in your kitchen without permission from the council.
Now they claim to want to cut regulation. This has something of a familiar ring to it. In 1997, Mr Blair set up a Better Regulation Task Force. In 1998, Mr Brown launched a Better Regulation Guide. In 1999, the Government passed a Regulatory Reform Bill.
Along the way since then, we've have red tape czars, check lists, action plans, panels and reviews. None of them has made the slightest difference.
Nor do the specific proposals in the Budget inspire any confidence at all. First of all, in a move typical of New Labour, the Government plans to set up two more new quangos, a Better Regulation Executive and a Better Regulation Commission, both within the Cabinet Office.
There they will join the Strategy Unit, the Delivery Unit and the Office of Public Services Reform, all created by the Prime Minister, all providing jobs for expensive civil servants.
I would like to offer a link to the full article but sadly I have not been able to track it down on the Mail website.
I made a return visit to Canary Wharf on Wednesday after being asked to write a leader on the budget for the Daily Telegraph. An editorial is, of course, the view of a newspaper, not of the individual who has written it. Nevertheless, I agree with it. In doing the research, I was struck most of all by the figure for the current income tax allowance in Poland. Unlike the British government, the Polish does not seem to believe in taxing the poor. The leader is here.
What astonished me yesterday - and again today - is the respect in which Gordon Brown is held. The Daily Mail, a newspaper I generally admire, is against the Labour Party yet still is in thrall to Mr Brown. The leader in it yesterday called him "awesome" while at the same time being highly critical of the statist society he stands for. Very curious. Meanwhile the poll in today's Telegraph show that Mr Brown is widely respected and admired among the populace. Yet this is the man who, in 1993, said he wanted to end means-testing for the elderly and has proceeded to make half the pensioner population entitled to means-testing. He has undermined saving, thus reducing the incomes of millions of people in their old age. He has increased welfare dependency. He took a country with the some of the best savings for old age and destroyed that inheritance. His social security policies have been ignorant and damaging. Beveridge would have scorned him. Frank Field does - and wrote a book to that effect, comparing him unfavourably with Lloyd George.
Yes, he had one big success in handing over control of interest rates to a monetary policy committee. But he has been wholly inconsistent. He came to power thinking he could improve the public services without extra spending. That was the mandate and the promise. He failed. So he resorted to the Old Labour technique, in 2000, of throwing more and more money at the public services. This sudden infusion of money has not been used efficiently and productively. Brown opposed the reforms in the NHS which have had some modest success. In the course of his spending, he has increased the taxes on the poor. The personal allowance next year will still be less than £5000. If it had been increased in line with earning, it would be over £5,500. So more poor people are liable to tax on more of their income. True, there are tax credits. But by definition they have three disadvantages:
1. People have to fill in forms to get them which, at best, is a waste of their time
2. A large minority - usually the most vulnerable and least literate - don't fill in the forms and so don't get the money.
3. If you are not entitled to one of the tax credits, you get taxed. For example, a non-pensioner who does not have children. If you are poor, bad luck. Under Brown, you are not one of the favoured groups. You are taxed heavily even though, according to Brown himself, you are in 'poverty'.
The spending goes on, pushing public expenditure as a percentage of national income back towards the level it was in the early 1980's and before. Public spending is less productive than private spending. Huge amounts of money are wasted. He is gradually undermining Britain's capacity for growth, just as the socialists did in Germany.
He is the most overrated Chancellor of the Exchequer of my lifetime - and that is saying something considering we had Lord Barber setting off the inflation of the 1970s.
Each year, it seems that Gordon Brown has little room for manoeuvre and yet each year he manages to convince many journalists that he has dished out money and pulled off a triumph. He always seems to have some extra money to spend.
Where does the extra money come from?
It comes from various places, but nearly always from two places in particular.
First, he does not raise tax thresholds in line with the growth of the whole economy. He just raises them with inflation, which is less because it does not include economic growth. This means that - as the country becomes richer - he takes a higher proportion of national income in tax. Through his failure to raise income tax thresholds in line with the economy, he has made an extra 1.35 million people liable to higher rate income tax. A higher proportion of people's income has become liable to standard rate income tax (the personal allowance for next year will be less than Â£4,900 whereas, if it had been increased with earnings since 1997/98, it would be over Â£5,500). Although he has doubled the stamp duty allowance in this budget, throughout his time in office until today, more people have become liable to stamp duty on their house purchases - and it continues to be the case that many have crossed the thresholds to higher stamp duty rates. So it goes on and on. Inheritance tax is another one that has had the Gordon Brown treatment. All these failures to raise threshold in line with the economy, amount, in reality, to tax increases. They are increases in the proportion of national income that the nation pays in tax.
His second technique is to raise welfare benefits, too, in line with inflation - not in line with the economy. So gradually, he has cut welfare benefits in relation to the whole economy.
That is how he gets extra money every year. He taxes us more, without declaring it, and he pays out lower benefits, without declaring that either. To some, he seems clever. But all he is doing is giving us back some of the money he has taken. Most commentators have no understanding of what is going on and therefore cannot pass on a true understanding to the public.
Does it matter?
Yes, it does rather. It is much better to avoid taxing people in the first place than to require them to fill in forms to claim tax back. The latter method involves an expensive bureaucracy and many of the people who are entitled to tax credits do not claim them. Often these are the poorest, oldest or least able. For him to paint himself as acting for their benefit verges on the obscene.