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Thinking the Unthinkable – how’s this going to be paid for?

May 1st, 2020

We cannot go back to how we were

This is the reaction of many to the pandemic, now stalking many lands. Globalisation – at least as enjoyed over the last few decades – is over, a reset of relations with China, a change to the state’s role to the chagrin of those wanting a small state, low taxes, free markets, borders will not be as open as before etc.,. Well, some or all of this is probably true. Big events do change the political and economic landscape – wars and serious economic shocks certainly do. Whether pandemics do is less clear. The Black Death certainly did. The Spanish flu, however, did not. Nor did the flu pandemics of 1957 (started in China) or 1968 – 1970 (from HK) which, in each case, killed between 1 – 4 million people worldwide and at least 30,00 in the U.K.

Whatever else we can say about this virus, the strategy currently employed by all governments to a greater or lesser extent to minimise its human impact, is having a serious, possibly catastrophic, economic impact, which will itself have a further damaging impact on those humans saved. How will the government’s support for those affected be paid for? How will the economic losses of the first half of this year (likely even longer) be paid for?  Printing money? Borrowing? Taxation?

Let’s concentrate on the last for now. Taxes will likely have to rise at some point and it is inevitable – and even intimated by the Chancellor – that these will have to rise on those who have been shielded from them until now. All sorts of tax measures previously unthinkable or politically too dangerous may now be available: NI on the self-employed, for instance. Or wealth taxes – a Land Value Tax, say. Doubling the rate of IHT has been telegraphed as a possibility.

It is felt that much of what is needed can be obtained by taxing wealth and assets, as if it is only income which has taken a battering. Time to cast aside the reverence given to wealth and tax it too – and more heavily than it has been. The unspoken assumption is that there is a pot of gold marked “Wealth” which will provide all (or most) of what is needed. This may not be a safe assumption. Wealth has taken a hammering too: anyone with shares (so every working person with a pension) has seen their wealth reduce. The housing market is affected too. Commercial landlords cannot be certain of their current let alone future income. All businesses – and their investors – dependant on discretionary consumer spending will be feeling a lot more financially insecure than they were three months ago. Many will not survive. The golden goose is going to be quite a lot slimmer well before it gets plucked.

So let’s think some of these unthinkable thoughts and go beyond the political boundaries we have been used to. Unpalatable questions need asking. Sacred cows may need slaughtering:-

Who pays?

  • The incidence of tax. Not something which ever appears in a headline or which many understand but as important as tax rates. The narrower a tax base is, the more vulnerable an economy is to a disappearance  or significant weakening of that base. It’s what happened post the GFC when all those banking revenues disappeared. It’s what is happening now, as people lose their jobs and reign in their spending. What do we do then?
  • Our income tax base is relatively narrow. All the push in recent years has been to take ever more people out of tax at the lower end. Maybe we need to ask why the poor should be shielded from paying any income tax – even if that contribution is very modest indeed. If payment of tax is the price to pay for our society and the services provided to all – whether they use them or not – shouldn’t all citizens contribute? So increase rates, yes, but make sure all contribute something. We could call this The Widow’s Mite approach to taxation.
  • The same can be said of corporation taxes or, more broadly, taxes on companies. Too many companies think a country is a market to make money from rather than a country to which obligations are owed because of the benefits companies derive from the services paid for by others. All very well big companies thanking us for staying at home in self-congratulatory advertisements while they make ever more money out of us. How about showing their thanks with some real cash. And not as part of some sweetheart deal with overworked tax inspectors either – as if they were doing us a favour – but as a matter of course.

Too many exemptions

  • Another version of the incidence issue. VAT is a tax largely imposed on discretionary spending of all kind, precisely the sort of spending which has been – and likely will continue to be – hit for some time to come. Oh dear. But also a tax whose incidence is narrower than in other European countries: it is charged on food and books in most European countries. Not here. The list of exemptions from VAT is notably longer in the U.K. than elsewhere in Europe. Is it now time to remove all these exemptions rather than increasing them, as the Chancellor has just done?
  • An Englishman’s home – yes it may be his castle and the subject of innumerable property programmes currently infesting day-time TV schedules. But why should it be exempt from CGT? The big criticism of a wealth tax is that a home confers no income so such a tax would need to be paid out of income, but without reference to its level. Or by selling the asset. In which case, why not explicitly levy the tax on sale when there can be no doubt about value or the seller’s ability to pay?
  • IHT – a tax which evokes strong emotions. There is little cool rationality when it comes to death and money, as any 19th century French novelist could tell you. Taxing at a time of grief, taxing the instinct to help and protect those you love the most seems (to many) particularly cruel and hard-hearted. To others the “windfall” nature of inheritances feels like unfair luck, not earned or merited. It is a tax whose current form is perfectly designed both to annoy and to make it worthwhile to avoid: too high a rate and too many exemptions. Lower the rate significantly and abolish the exemptions. Even the one for spouses? Why not? Why should an adult spouse inherit an estate tax-free but not a child?
  • Remember the fuss big charity donors made when Osborne put a limit on the tax advantages gained by them. To hear the squeals you’d have thought that getting a tax advantage was more important than helping the charity. Surely not. Time for something like that again. Maybe time also to limit some of the other tax advantages enjoyed by charities, many of whom are pretty big businesses. We know about public schools. But why should donations to political parties be IHT exempt? Why should charities be exempt from tax on trading profits? Or business rates?

Putting our money where our clapping hands are

  • Rainbows and claps for the NHS and bin-men and other essential but largely invisible workers are doubtless very heart-warming. So how about paying directly for some of these services. We already do – for prescriptions and some local authority services. Why not extend this? If these services are so important to us why shouldn’t we want to pay more, especially for what we use directly. Not instead of taxation but in addition to. It’s not either or, even if that is how the argument has always been framed until now. We happily pay to see vets for our pets, rich and poor alike. If we can afford those costs, then we can surely afford to pay for our beloved NHS and other essential workers. Health charges are, after all, common elsewhere in Europe. 

I am not advocating these. I can hear the cries of pain and “NFW” already. Many will be unpopular; others politically impossible. There may be good economic reasons against them, the most obvious being that a damaged economy does not need demand depressed further. There may be unintended consequences worse than the cure. There may well be better solutions and suggestions.

Still, it is striking that the solutions people often come up with after a crisis tend to be ones people wanted anyway rather than genuinely fresh thinking (I make no claims in this regard.) As with much else arising from this virus, difficult choices are having to be made – and will be needed long after this pandemic is resolved.

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