Alex Wild is Research Director of the TaxPayers’ Alliance.
Labour has shifted its campaign on to the NHS this week, although a potential deal with the SNP is what’s getting the headlines. Next week its campaign will most likely focus on the cost of living, hoping to score some hits from ground on which it is comfortable.
It is important to remember that taxes are the biggest cost of living. And recent reports suggest that Labour may seek to hike some of these taxes should they win in a fortnight’s time.
In fact, even the Conservative manifesto only commits to no rises in income tax, national insurance or VAT. And whilst these are the three biggest revenue raisers, they only account for 60 per cent of current receipts.
Other tax rises could be on the cards whoever forms the next government.
For instance, it might be tempting to increase Air Passenger Duty (APD).
When it was introduced in 1994, a family of four flying abroad on holiday would have had to pay the government £40 for the privilege. Today their APD bill would be £284 to fly economy or £568 to fly premium economy.
What makes this 610 per cent/1320 per cent increase all the more galling is that the environmental case Gordon Brown cited as his rationale for massive rate hikes simply doesn’t stack up.
When Ken Clarke introduced APD in his 1993 Budget, he made no reference whatsoever to the environment. And since 2012 aviation emissions have been covered under the European Union Emission Trading Scheme. There is no environmental case – the public have been conned by the green lobby and politicians all too happy to use them as cover for tax increases.
But many people on lower incomes don’t pay income tax or take holidays abroad. To extract money from them, the next government will need to hike other taxes. The most likely ones are vehicle excise duty and duties on tobacco, alcohol and fuel.
As Chris Snowdon of the Institute of Economic Affairs points out:
“Despite significantly lower rates of alcohol consumption and car ownership, the poorest income group spends twice as much on sin taxes and VAT than the wealthiest income group as a proportion of their income. Tax is the single biggest source of expenditure for those who live in poverty.”
Fuel duty is a particularly popular target because demand for petrol and diesel is extremely inelastic. Despite what some metropolitans believe, car ownership is widespread and crucial for those at the bottom end of the income spectrum.
Despite fuel duty being frozen over the last few years, taxes still make up almost 70 per cent of the cost of filling up. The poorest 20 per cent of households spend almost 4 per cent of their income on motor fuel taxes and vehicle excise duty compared to 2.3 per cent for the richest 20 per cent.
Harriet Harman refused to rule out what would be a highly regressive hike in fuel duty two weeks ago, so that could mean it’s very much in their plans.
Duty escalators – when taxes rise by a certain amount above inflation every year – on products like tobacco offer politicians a stealthy way of hiking taxes without saying they are doing so.
For instance when George Osborne said at the Budget that he had “no changes to make to the duties on tobacco already announced”, what he actually meant was that he was increasing tobacco duty by two per cent above inflation. Then there’s VAT at 20 per cent and another element of tobacco duty at 16.5 per cent of the retail price.
The average smoker from the poorest fifth of households spends around 17 per cent of their disposable income on taxes on cigarettes.
Mercifully, the escalators on alcohol and fuel have been scrapped, but reinstating both could be a tempting alternative to spending restraint.
The most ardent advocates of increasing taxes that hit the poorest hardest are condescending taxpayer-funded groups such as Alcohol Concern and ASH. As with environmental groups, politicians are likely to use them as cover for increasing taxes that disproportionately hit the poor.
More broadly, and worryingly, the public seem to be buying the idea that there is some huge source of untapped revenue which can be accessed without any adverse consequences. Ideas that endless billions can be raised by a fantastical “clamp down” on tax avoidance or by “asking” the rich to “contribute” a bit more have taken hold.
The truth is that the UK’s gigantic public sector is extremely and dangerously reliant on a very small number of taxpayers. With the top one per cent of earners paying 27 per cent of all income tax and the top five per cent just under 50 per cent, the public finances are highly vulnerable to changes in the behaviour of a small number of individuals.
So despite continuously bashing the rich, senior politicians on the left understand that to pay for the promises they make they will have to tax the middle classes and the poor much more heavily.
Corporation tax is perhaps their most devious tool.
Those proposing increases in corporation tax are fully aware that companies cannot be taxed – only people can.
A company is merely a bundle of documents at Companies House. Hiking corporation tax just means lower returns for shareholders, higher prices for customers and lower wages for workers.
Indeed, most of the evidence suggests that it is the last group who bear most of the burden. Reducing returns on capital means less investment, lower productivity and lower wages.
As for the middle classes, the weapon of choice for George Osborne and his predecessors has been fiscal drag.
Whilst the Labour Party manifesto said “we will not increase the basic or higher rates of Income Tax or National Insurance. Nor will we raise VAT”, nothing was said about thresholds. So just as more and more people have been sucked into paying the 40p rate over the past 20 years, it looks certain that a Labour government would continue the wheeze to extract more from the middle classes.
For all the talk about taxing the “rich”, if whatever government is formed after the election continues to throw such massive sums at wasteful public services, everyone will end up paying the price.