Soaking the rich or even a general increase in rates won’t change our risk averse culture, writes Bill Jamieson
A bright new future! A manifesto for a New Britain! A transformational plan! If by some remote chance these ringing manifesto declarations may have slipped your attention this week, there will be plenty of opportunity to hear them – again and again – till 7 May.
And you may well come to believe this heady rhetoric and the fractious daily battle over tax and spend projections really will result in a notable change in our national lot – specifically government spending and the tax take.
The passion over tax and spending would certainly suggest as much. But here’s a funny thing. The most striking feature of the UK’s tax revenue over the years – indeed, over decades – is not so much how it has changed with the ebb and flow of the political and economic tides, but how little.
Clem Attlee, the two Harolds – Wilson and Macmillan – Thatcher, Blair and Brown came and went. Ferocious political battles were fought. The economy rose and fell. But despite all this the government’s revenue take as a percentage of national income has moved by very little. It fluctuates – gently – in a tight corridor.
For the year to 5 April 2016 the revenue take is reckoned at 35.5 per cent of GDP. In 2010-11 it was… 36.3 per cent of GDP. In 1998—87 it was … 34.9 per cent.
Indeed, in the years between 1987-88 and 2014-15 – it has fluctuated between 36 per cent and 39 per cent of GDP. And even going back to 1949 it has risen above 40 per cent in just 16 out of 66 years.
But that is not the only remarkable feature of our public finances. Despite rates of income tax soaring to 96 per cent, tumbling back down to 40 per cent and back up to 50 per cent, the amount of tax actually brought in as a percentage of GDP has barely changed. It has been astonishingly static.
What explains this paradox? Writing on the website CapX, the academic and venture capitalist Jon Moynihan, former executive chairman of PA Consulting, points to a simple but much overlooked truth: that as tax rates go up, not only is economic activity hit, but tax avoidance also rises. Whenever GDP goes up, tax receipts go up – but it doesn’t at all follow that higher tax rates boost GDP. Tax receipts as a percentage of GDP tend to stay the same.
So how is it that many countries push for different levels of tax-to-GDP? Norway was able at one point to run its tax take at a little above 55 per cent of GDP. France has sought to push it up above 50 per cent of GDP – and met keen resistance. In America, not even a Democrat presidency can raise the tax take above 34 per cent of its economy.
Moynihan’s explanation is that each country has a “natural” level of tax take from which it is hard to shift. And the probable explanation lies in different cultures.
The Dutch social psychologist Gerard Hendrik Hofstede identified six features by which countries’ cultures differ from each other, two of which might impact on the level of tax take in a given country. The first is what he dubbed “masculinity” – the degree to which a country’s culture focuses on ambition and performance as opposed to focusing on issues such as quality of life, service and social empathy.
The second was “uncertainty avoidance” – a perceived need for security in life, and career stability – “don’t take risks”, as opposed to a willingness to take risks.
This analysis, says Moynihan, “illustrates a point that most people will believe to be true – that a country’s culture will drive its behavioural reaction to changes in tax rates”. Cultural reaction “will alter the amount of money paid in tax to such a degree that the amount of tax money received will stay the same, no matter how extensively the government decides to tinker with rates”.
Simply racking up tax rates and levels in a bid to transform us into a Nordic Nirvana with the tax-to-GDP ratio up at 45 per cent and over won’t work in the manner intended because of cultural and behavioural differences. And changing these could take many decades to effect – even assuming the UK with its individualistic culture wanted to change in this way. Nordic model enthusiasts say it’s a simple matter of hiking tax. But our culture, says Moynihan, is too ingrained to change overnight.
And without culture change, would it really be the case that the populace would hand over more tax as a percentage of GDP when the tax regime is changed? There are several obstacles, including of course the behavioural effect of a tax change.
Soaking the rich has won lots of audience applause in this election. But the top 1 per cent – and the most mobile group of taxpayers – pay almost 30 per cent of all UK income tax. Many of these are non-doms who, according to the Economist, pay some £8.4 billion in tax in the UK.
Raising the top rates of tax, imposing mansion taxes, removing non-dom status may be rhetorically popular. But I’m not so sure, looking at the behavioural effect of such policies, I would be keen to join Natalie Bennett in driving the fleeing wealthy to the airport.
As Labour’s Ed Balls feared – or did so before the election campaign – GDP would slow and the total tax take would drop, too, with more of the tax burden falling on those with not-so-broad shoulders – the very opposite of what Labour’s Left and the SNP intend.
How, then, to improve the UK’s finances?
First, says Moynihan, grow GDP rather than tinker endlessly with the tax code. And try to keep spending at 36 per cent of GDP.
Every time we veer above 40 per cent – as with 46 per cent in 2009-10 – we hit trouble and end up with mounting debt.
High spend, high tax advocates may regard these UK tax and spending “corridors” as too restrictive. But they have been stood the test of decades for a reason. And despite all the soaring rhetoric of transformation, don’t expect them to change much any time soon.