Bill Jamieson: Shout it out, there’s a price to be paid

‘More than two million people will be taken out of tax altogether!” How the Commons cheered this sentence in the Budget speech. It is by no means a new or original claim in budgets. I have covered most of them since the early 1970s and I would say that the majority of chancellors over the past 35 years have proclaimed the triumphal line that their budget has “lifted millions out of tax”.

Were this literally true, of course, the entire taxpaying population would have ceased paying income tax decades ago. However, less prominently announced each year is the steady, insidious, threshing machine of inflation that invisibly sweeps hundreds of thousands of us back into tax – and in due course into higher tax brackets.

Most of us favour paying less tax. And we think it only right that as many lower income families as possible should not be burdened with income tax. It plays to our sense of fairness while the retention of money in people’s pockets also provides a much needed stimulus to spending and demand.

Top marks, then, for this Budget line yesterday? I give it a very low score.

I have always been in favour of a small state, low tax economy. But I believe as many people as possible should pay some tax. Even if it is only a modest amount, as many as possible should pay something.

Government, and the goods and services it provides, should never be some abstraction detached from the citizens it is obligated to serve. It is just as wrong to encourage the view that no tax need be paid as it is to allow the better off to carry a lighter burden pro rata.

The reason is that a central requirement of any nation is cohesiveness: a sense – to borrow a phrase – that “we’re all in it together”, and that enjoying the rights and privileges of a state requires a universal contribution of sorts. It is one, I repeat, that can be modest for lower income households. But a contribution should be required all the same.

One of the greatest problems facing modern liberal democracies today is a marked and growing failure to align the rising welfare expectations of voters with the costs incurred in seeking to meet them. In those areas that have grown to become the central business of a modern liberal state – public safety, legal assistance, defence, health, education and welfare – the machinery of provision is ever more extensive, costly and sophisticated. And many of these services are not only regarded as rights and entitlements, provided not only “free at the point of use”, but also now totally free for a significant number of any obligation to pay.

In this we not only stoke up a culture of division (who pays and who doesn’t) but strengthen an expectation that such services are indeed somehow “free” and costless. And the more that this view gains currency, the greater the clamour for ever more voters to be exempt from payment. Before long, the sense of obligation between those who pay a lot in tax and those who pay nothing will be corroded. The modern state, with all its increasingly sophisticated machinery of service and delivery, would soon be at risk.

There are other dangers in exempting “millions from tax”. The greater the number who do not pay any tax, the greater the ease with which politicians can drive up the bidding in vote-winning spending, particularly with a constituency of voters who pay nothing. This is a phenomenon by no means confined to the UK. Indeed, the prevalence of colossal budget deficits and debt across the western world suggests that the financial crisis was less the cause than the effect of a greater malaise: the reluctance or inability of democracies to reconcile a political culture that thrives on dispensing “free” benefits and the need for these to be paid for out of taxation. Borrowing takes you so far before the balloon bursts.

A third reason for questioning the wisdom of “millions lifted out of tax” is equity. If we wish all those government services to continue to be provided, a greater burden comes to be borne by those who have not been exempted. This, as the Labour leader recently labelled it, is “the squeezed middle”. And with the need to curb borrowing, the “squeezed middle” has to stump up even more. And that, of course, is exactly what is happening: some 300,000 more will be drawn into the higher 40 per cent tax band rate from 2013-14 as the threshold is reduced from £42,475 to £41,450.

The Budget overall has sought to reconcile not only competing claims within the coalition but also the need to boost growth and help encourage business and business lending while sticking to the deficit reduction plan. The price of lowering the 50p tax band is a 7 per cent mansion stamp duty tax and a crackdown on tax “avoision” – that twilight zone between legitimate tax mitigation and illegal tax evasion. If there is any line more familiar in budget speeches over the years it is the earnest declaration to clamp down hard on tax dodging. Millions of people to be taken out of tax and hundreds of millions of pounds raked in through “closing loopholes”: George Osborne scored double yesterday. They are illusions, both. But no budget ever seems quite complete without them.