Taxing taxes

The tax regime in the UK is complicated. Today, I propose to write about broad themes in relation to tax, rather than about the detail of tax and policy relating to it.

Economists are eager to draw graphs. In relation to tax, they draw a graph that compares the revenue raised by a tax authority with the marginal rates at which the tax is charged; the resulting graph is called a ‘Laffer curve’ – see here for Wikipedia’s entry for it.

In its simplest form, the curve is even and in the shape of a bell or normal curve. At the lower end, the revenue raised is zero, the tax rate is zero. Somewhere in the middle, the tax rate raises the maximum revenue and at high marginal rates of tax, the revenues fall off, eventually to zero.

The problems with the Laffer curve lie in the assumptions about human behaviour that are implicit in the drawing of it. The result is that there are many arguments about its validity and where the ‘optimum’ rate may lie. In simplistic terms, the UK government has accepted, for about the last 20 years, that the optimum rate in the UK lies with a top rate tax at 40% of income … but does it remain at that level?

Increased globalisation; the speed and ease with which companies and individuals can locate themselves anywhere to conduct business, particularly financial business; the increased competition between countries, even within the EU, as to personal and corporate tax rates; all suggest that there may be downward pressure on the optimum rate in any particular Laffer curve. What do you think?

Even if there is such downward pressure, would it matter if the European headquarters for this or that company were located elsewhere within the EU where the marginal rates or thresholds were lower? My view is that it probably does matter if many businesses were to move, but we should not be too concerned if a number of businesses do move, while others establish themselves here.

The difficulty for Conservatives in opposition is that when we talk about the Laffer curve and taxation in this way we are accused of ‘not caring’ or even of being uninterested in the poor. This is a caricature … as a conservative and Conservative I want to find methods for ensuring that we find the means to reduce poverty and reduce the burden of taxation on the poorest taxpayers; whether by means of increased thresholds or reduced marginal rates or a combination of the two.

The problem is that when I talk about the abolition of the 10p rate, and I say that I oppose it, I am told that I am inconsistent as my party opposed its introduction too. My opposition to the abolition of the 10p rate is principally an opposition to the cynical and partisan reason for its abolition – that Gordon Brown wanted to present a budget in which he reduced income tax and that in order to do so he doubled the marginal rate of income tax on some of our lowest paid citizens.

If Gordon Brown wants to simplify tax or to reduce the tax burden he will need to do something that for the last 5 years and a bit he has resisted doing – make the revenues raised and spent by him work better and go further and resist the demands for ever-increasing expenditure which he beguilingly but disingenuously calls ‘investment’.