Osborne, Tax and Growth

The Chancellor now has his back to the wall. Only bits of his policy are working. Growth is not, neither is the deficit reduction. This is because it was never quite as simple as that. There are two primary problems. One is that the government spends more than it receives. The other is that the economy was built without a sustainable foundation. The two problems have different roots, but their branches are entwined, leading to a good deal of confusion.

Since the reform of income tax undertaken by the first Thatcher government, which reduced rates but increased revenue, there has been an assumption that more of the same would yield ever better results. It has not. Because income and corporation taxes do not yield enough, all sorts of other spending taxes have to be filtered in to the system to push up cash flow, as well as a much higher rate of vat than the 7.5% Thatcher inherited. The whole structure is now so over tinkered with that it has become dysfunctional and radical taxation reform is now again called for.

The second element is that the economy never expanded as much as the gross figures suggested, since too much of it was on borrowed money. As has previously been posted on this blog, assets were inflated by excessive leverage, turnover was expanded by unrestricted credit, and even taxes were paid from borrowed money. Net the position in 2007 and you will find that compared to that, the current flat-lining economy, with its much more tight fisted attitude to borrowing, has grown quite a bit.

What is required to make it all come good is to put taxes on an equally sound footing. This blog believes that no income tax should be paid by anyone on or below the average wage and above that there should be one rate only, probably somewhere in the mid thirties. This blog also believes that corporation tax should be abolished, along with the notion of profit as a tax measurement, to be replaced by a turnover tax paid by all companies on all money crossing palms in the UK, wherever the head office is or profits are declared. Small businesses with a turnover of less than 10x the average annual wage  would be exempt, to encourage start-ups and neighbourhood enterprise.

The aim would be full employment and national self sufficiency, both aspirations worth aiming for, providing a clear vision for the whole nation. This would be boosted by a huge programme of infrastructure renewal and house building (at least a million homes) funded by quantitative easing, which thus far has boosted the City but had little effect on the rest of the economy. That would in turn reduce the value of sterling making imports very much more expensive and creating opportunities for home manufacture of consumer products as well as competitive exports.

There is a lot more that needs doing. Sorting out the energy market, where privatisation has had some success but caused many problems, suggesting that while distribution could remain in private hands, power generation should not, is a top priority. No economy can recover and prosper with our current levels of energy costs. The NHS must be detached from general taxation and have its own revenue stream related to what it has to spend to keep the nation healthy. Giving an infinite service a finite budget and expecting everything to work is as batty as giving Tesco a fixed annual sum and ordering them to feed the nation. We would have waiting lists for Marmite and targets for bacon consumption presided over by trusts, foundations, food commissioning bodies and a Gothic orgy of bureaucratic regulation. Also everyone would be hungry.

Will Osborne do any of this?

You do not have to be told the answer to that.

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