Compass have published a new report this morning. Entitled ‘In Place of Cuts:Tax reform to build a fairer society ’, it puts forward a comprehensive analysis of the UK Tax system and offers a straight forward set of proposals which would start to make it fairer. The report was written by George Irvin, Dave Byrne, Richard Murphy, Howard Reed and Sally Ruane.
Polly Toynbee covers the report in this morning’s Guardian, saying:
Today a detailed study by economists and tax experts spells out how tax reform could take the brunt of raising the funds to cut the deficit. Compass, the centre-left pressure group, has again come up with the new thinking that Labour's high command seems to lack. In Place of Cuts — whose authors include Howard Reed, the former chief economist of the Institute for Public Policy Research, and Richard Murphy, of Tax Research UK — offers a plan to rebalance the tax system so that the rich pay a fairer share, and enough cash is raised to avoid frontline cuts.
The tax system has become more regressive in the last 30 years, so that the poorest tenth pay 46% of their earnings in tax while the richest tenth only pay 34%. That tax shift coincided with a widening gap in earnings: the richest fifth of households take 51% of national income while the poorest fifth receive 3%. By raising the top tax rate to 50% for earnings over £100,000 and uncapping the top rate of national insurance, the balance can be reset.
Other necessary reforms would set capital gains tax back where it was under Nigel Lawson, at the same rate as income tax — to stop the rich rebranding much of their income as capital gains, only taxed at 18%. That is a key reason why on average they pay only 34% tax, and not the 40% they should. To help the lowest paid, the 10p tax band would be restored and the basic rate put back to 22%. Non-doms could no longer pretend to live in Monaco while living in the UK for four working days a week. A tax on financial transactions, tougher tax-avoidance measures, and the axing of Trident, ID cards, aircraft carriers and fighter planes, brings total savings to £47bn a year. Apologies for this crude summary: don't post objections until you read the technical details for yourself to see how this can be done.
The net result is this: these reforms would raise enough over the next four years to pay down as much of the deficit as necessary. At the same time, 90% of taxpayers would be better off, while the top 10% would contribute a fairer share of their incomes. It does hit top-rate taxpayers hard — the cumulative effect of these changes will add 12.6% to their tax bills, most of that paid by the top few per cent.
As importantly Polly asks:
Is that politically feasible? Yes, if the Labour cabinet has the nerve to break with everything it has done so far. New exigencies require new policies, and it's time to break with the past. There are no votes to be lost by this. Few of the top 10% of earners vote Labour — and their complaints would be drowned out by the other 90%.
Politically, boldness such as this would leave Cameron and George Osborne again defending the wealth of the very few against the interests of the many. Would most people prefer cuts in schools, hospitals, Sure Starts, police and just about everything else? Believe not a word the parties say about protecting frontline services: the cuts they plan are deeper than anything before and can't be confined to "bureaucrats" and "quangos". They will hurt everyone, they risk the recovery, and will cause another wave of unemployment.
And Polly has noted what we have said and others have yet to pick up on:
Among the startling figures in this report is the true cost of public sector cuts. Assuming a 10% cut in the 5 million public employees, 500,000 would lose their jobs. The sums here show that the gains are small compared with the cost to the state of added unemployment — and that's without the upfront cost of redundancy pay.
This is the reality of Conservative politics that we are facing.
And as Polly notes — please read the report before commenting. Informed debate is much the best way of getting to answers, which is precisely why I am involved in studies of this sort.
Thanks to Compass, and my co-authors, with whom it has been fun to work.
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[…] those interested, I am discussing the new Compass tax report on the Today programme, BC Radio 4 at 8.40 this […]
[…] those interested, I am discussing the new Compass tax report on the Today programme, BC Radio 4 at 8.40 this […]
The Compass report (Introduction P6) states that “the UK ranks 17th” in terms of top rates of Income tax. There are only 13 states that have a higher rate (per the European Commission paper). It is actually 14th equal on 40.0% along with Greece, Hungary and Poland. Is this an error or were you demoting the UK 3 places on alphabetical order?
Well, you ask for informed comment and I have read the report.
“the taxable
income elasticity is likely to be small, if not zero.”
That’s a huge assumption, that moving average tax rates from 34% to 55% will have no effect on behaviour. That moving marginal tax rates up to 75% will have no such effect.
In fact, it’s such a huge assumption that there has to be serious doubt as to whether it’s actually true. Slightly more realistic assumptions could well mean that such tax changes reduce tax collected, not increase it.
Tim
It is an assumption
Please provide evidence for the alternative hypothesis. Please don’t just say ‘Laffer’ – provide evidence and state reasons why it might apply on the scale you suggest
I have never found any credible evidence to support the idea
Please recall that you must take social factors into account when presenting your evidence. And remember – many people have little choice over their earnings and the vast majority live to the limit of their income and beyond
Richard
Richard,
While we are waiting on Tim to provide evidence regarding his post, can TR-UK provide the very same credible evidence which supports their assumption that such increases in average/marginal rates will have zero effect on behaviour? That would be real evidence and examples, not just some vague talk about “social justice” or some other empty term(s).
Georges
Richard: I haven’t suggested a scale at all. I’ve simply suggested that your assumption that there are no dynamic effects from such a change in tax levels might be wrong.
We know very well that changing tax rates changes behaviour:
“I have never found any credible evidence to support the idea”
That’s an extremely odd statement. You recommend a Tobin Tax because you think it will change behaviour. I’ve no doubt that you support certain excise taxes for the way that they change behaviour. The thought that behaviour will not change in reaction to changes in labour taxation is simply amazing. It’s so amazing that it’s one of those things that it is incumbent upon you to prove given that it’s so at odds with what almost every economist says about taxation.
@Richard Murphy
Having been for a long time until recently an overseas US taxpayer, I cannot help but laugh at the bit your report about Non-doms:
“This system needs simplification and reform to stop abuse. The simplest reform would be the most effective: all UK passport holders should pay UK tax on all their worldwide income whether or not they are in the UK. Their tax position would be very clear….”
The portion of the Code that deals with the worldewide taxation of US Citizens and Residents must surely be the most expensive in terms of compliance and enforcement, and the most irrelevant in terms of revenues generated. That you even propose to introduce the same system in the local UK system really does no good to your credibility.
Sorry.
why attack the Tories? It’s not just the Tories that are advocating cuts in Government spending. You might not have noticed, but even Gordon is doing it.
From Stephanie Flanders blog:
“On the Today programme this morning, Richard Murphy, director of Tax Research UK, made the case for raising an extra £47bn in taxes to full the fiscal hole, almost entirely from the top 10% of earners or corporations. It has a good populist ring to it. But it doesn’t seem likely to win over the public – or most economists.”
Tim: “We know very well that changing tax rates changes behaviour”.
Do we? Er… sadly not in this particular case.
Neoclassical labour supply theory can’t even give a straightforward prediction about whether people will work more or less in response to a tax increase. The balance of studies of labour supply elasticities suggests that for men (who are much likely to be in the super high earners category than women) the elasticity of hours worked to labour supply is about -0.1 – i.e. it’s very close to zero. In this context, Richard’s statement “I have never found any credible evidence to support the idea” is a good summary of the econometric evidence.
@alastair harris
He was
Much less now
His policy is not right
But it’s better than Osborne’s and miles better than the Lib Dems
Richard
“Neoclassical labour supply theory can’t even give a straightforward prediction about whether people will work more or less in response to a tax increase.”
Sure, there’s both the income effect and the substitution effect. The balance of these tells us what the total change will be. (Note, if I thought that Richard even knew what these were I’d be less harsh about his one line dismissal of the whole idea).
“that for men” And we also know that labour elasticities for women are hugely greater than they are for men. Do also note that we’re not talking about “super high earners” here. We’re talking about the top decile, the top 10%, not the top 0.1% or so. So there are indeed many women in there.
In fact, thinking about this now, given the different labour elasticities for men and women, this rise in tax rates would increase the gender pay gap. Nice side effect, eh?
[…] has been an interesting response to the Compass tax report. One has been to challenge why my co-authors and I did say that: Of course the right will argue that higher taxes will just […]
See http://www.taxresearch.org.uk/Blog/2009/11/25/will-the-best-off-cut-their-income-if-tax-rates-rise/ for more comment
[…] has been an interesting response to the Compass tax report. One has been to challenge why my co-authors and I did say that: Of course the right will argue that higher taxes will just […]
I listened to Mr Murphy on Radio 4 proposing to increase taxes on higher earners in order to fund public spending. However evidence clearly indicates that every time the Government has increased the tax rate to above 50% their income has in fact declined. So perhaps not the best idea.
@J Rayner
That is not the case: you are not controlling for other factors
We are: we are proposing closing down many opportunities for avoidance
In that case your argument does not hold
Richard