Lord Flight is Chairman of Flight & Partners Recovery Fund, and is a former Shadow Chief Secretary to the Treasury.
It is sad to see a Conservative Government struggling to increase tax revenues where the truth is that there is little or no scope so to do, and where too often the effects of tax increases are damaging to the economy.
My key point is that tax rates should be determined by a proper Laffer Curve analysis to pitch the tax charge to optimise/maximise the tax income. Too often, raising tax rates too much serves to reduce the overall tax take. An interesting example has been Capital Gains Tax. The Labour Government reduced the CGT charge to 18 per cent, perceived as the optimal Laffer Curve rate; the then new Conservative-led Government put the rate up to 28 per cent, and the tax take declined.
The most recent major blunder has been the huge increase in Stamp Duty. At one end of the scale, this has made it yet more difficult for first time buyers, who then need to save the extra cash to pay the tax. This led the Chancellor to scrap Stamp Duty for first time buyer properties worth up to £300,000 or £500,000 in London. Not surprisingly, a YouGov study has found that scrapping Stamp Duty for those over 65 would greatly free up and encourage nearly three million pensioners to consider downsizing.
The Laffer Curve point is equally valid in this territory, where the net effect of the huge increase in Stamp Duty on properties costing £675,000 or more has simply frozen the market, and reduced the stamp duty revenue from the more expensive properties, particularly in the London market.
Young professionals working in London are now forced either to live out of the capital with a significant commute, or to live in a less attractive part of it. A key point here is that, quite rightly, buyers cannot borrow the funds to cover the stamp duty, which on an attractive house in the middle of London can be as much as £500,000.
The fundamental weakness of the UK economy since the Second World War has been an inadequate savings rate. This has been one of the reasons, latterly, for inadequate capital investment and poor productivity. Here the Government needs to be careful in getting rid of tax incentives for the better-off for pension and other forms of savings.
I warned at the time that the tax attack on non-domiciled individuals resident in the UK would be counterproductive as regards tax revenues. This is precisely what has happened. Large numbers of “non doms” have left the UK in favour of other countries with better tax deals – particularly Ireland. The tax revenues from non-doms has fallen as a result.
Here, and ahead of the damaging tax measures which, if elected, a Corbyn Government would pursue; we are already seeing an increase in the numbers of successful entrepreneurs leaving the UK for tax reasons. The Government should remember the extent to which the French economy suffered as a result of Francois Hollande’s policies, which drove large numbers of French businessmen to leave the country.
The truth is that UK Government spending, particularly as a proportion of GDP, is already higher than is comfortably financeable. It is the spending that needs to be controlled and reduced rather than taxes increased yet further.
There are, however, some areas where it would make sense to introduce taxation. It is widely accepted that problems associated with drugs and particularly cannabis would be addressed better if cannabis were legalised and available via doctors. There would thus also be medical records of those with drug addictions. Rather than paying excessive amounts on the black market, cannabis available via GPs could also carry a moderate tax charge. We have the ridiculous anomaly of tobacco now rated as just as bad for individuals’ health as cannabis, and being hugely over-taxed – but with cannabis and other drugs not liable to tax at all.