Allister Heath
What the Treasury needs is a radical new tax code for the whole country if it is to turbo-charge the economy
It was Milton Friedman who said that he was in favour of cutting taxes “under any circumstances and for any excuse, for any reason, whenever it’s possible” – and who am I to disagree with the master? I suppose we should therefore be grateful that the Chancellor has been forced into at least considering the idea of tax relief, albeit only for the “young”.
The rationale is simple: the explosion in asset prices has helped the over-35s but crippled the youth, who can no longer afford to buy a home. Over-40s enjoyed “free” higher education, while the young must now borrow to study.
It would be “fair”, the argument goes, to cut the taxes of younger people to compensate for some of this inter-generational bad luck. It would also, we are told, be good politics: apparently, 35-year-olds would flock back to the Tories if their stamp duty on £500,000 rabbit hutches were cut from £15,000 to, say, £10,000, or if their national insurance were trimmed. Perhaps most attractive for a debilitated government, there would be no need to address the root causes of low income growth, extortionate house prices or useless degrees.
I don’t buy any of this, and I’m convinced Friedman wouldn’t either if he knew the context. The plan would replace one injustice with several others, do nothing for overall economic efficiency and further toxify the great cause that is a genuinely smaller state. It would be yet another catastrophic missed opportunity to reboot Britain’s broken tax code. If the Tories genuinely think that this sort of patronising tinkering will save them from oblivion, then they really are doomed.
It’s almost as if the Chancellor had tasked the Treasury to find a way of showing that he is still a radical Tory reformer at heart, and that the civil servants, none of whom believe in real free-market economics, have come up with some weird ersatz in the hope of proving that their boss “gets it”. In fact, the scheme demonstrates that they have not the faintest clue about libertarian ideas, supply-side economics or the philosophy underpinning classical liberalism. They are pretending to believe in lower taxes, but don’t actually understand what it really means. To their technocratic, statist mind, a tax cut is morally equivalent to extra public spending: it’s the “Right-wing” alternative to the Left’s welfare handouts. It’s not about liberty, or incentives: it’s purely a “redistribution” mechanism.
Rather than starting from the basis that people are morally entitled to their earnings, and that the state should confiscate as little of them as it can, it assumes that any tax cut comes at a “cost” to the collective.
Yet real tax reductions change the relationship between state and individuals in a way that should cheer all Tories. They are culturally and economically liberating: they transform the way we think and act and unleash a nation’s energy, creativity and entrepreneurialism. It’s a tragedy that the Hammond Treasury still hasn’t freed itself from its neo brownite social engineering mindset. It still believes that it can fiddle and cajole and finesse and control.
Hence why, under the plans being mooted, any tax cuts for the “young” would be matched by hikes on the “old”, possibly via another reduction in the tax incentives to save for a pension. Britain’s tax code, already one of the most complicated and confusing in the world, would become even more arbitrary. The policy would infuriate older earners, turning them against the Tories. Far from calming down the war between the generations, it would exacerbate it.
It would also fail on its own terms. Why should a 22-year-old Premier League footballer pay a lower tax rate than a 58-year-old on the minimum wage? Why should parents – and in practice especially women who take career breaks to have children in their 20s and 30s – be penalised with a higher tax rate when they return to the workforce? Why should a twentysomething doctor pay a lower tax rate for doing the same job as a fortysomething who came to the profession late? And why should a fiftysomething with twentysomething dependent kids who still live at home pay more tax, thus hurting young people indirectly? It’s all dreadfully inconsistent.
If it really wants to help the youth, the Government should focus first on tackling the housing crisis. Land should urgently be released, new towns created and an entirely new privatesector house-building and infrastructure model created from the ashes of our current dysfunctional system. The aim should be to double house-building and, over the next decade, to substantially reduce the multiple of salary required for firsttime buyers to buy a decent property.
But while tax cuts have a vital role to play in this, they need to be part of a greater, coherent package and aimed at everybody, young and old. Philip Hammond should be working on rebuilding the tax system from scratch. He should launch a tax reform commission, tasked with implementing a completely new code by 2025. The ideal model would be a textbook flat tax, with all categories of income taxed just once and equally, above a generous personal allowance.
There should be a target for the tax-to-gdp ratio, set at a lower level; all forms of national insurance and income tax should merged; transaction taxes such as stamp duty abolished; and corporation tax, dividend tax and capital gains tax replaced by a new levy on distributed capital income. The marginal tax rate should never be higher than 30pc. All complications, exemptions and loopholes should be swept away.
The message to the world would be unmistakable: Britain is once again the home of enterprise, effort and success. Vast compliance costs would be taken out of the economy, and investment and growth would be turbo-charged. Such a radical tax reform would do more to bolster post-brexit Britain than any trade deal with the EU could possibly achieve. One can but dream.
The Tories are at a crossroads: they can relearn how to be economic and social revolutionaries, and inspire the young with their rediscovered optimism, conviction and ambition. Or they can chuck the youth a few crumbs, defend the status quo and prepare for a Marxist government.