Andy Burnham will find there is a limit to tax rises
Since tax increases are constrained by adverse behavioral responses and public resistance, the government must prioritise improving long-stagnant public sector efficiency, says Paul Ormerod
A brand new Cabinet is in place, with ministers eager to introduce new spending plans to demonstrate that they are making an impact.
To pay for these, a range of potential tax increases is being floated in the media. There does seem to be a welcome recognition that UK government debt is already high and the scope for increasing it without provoking sharp rises in interest rates is limited.
But how far are we away from the limits of the amounts of tax which can in fact be realistically levied?
Taxes are rarely popular. Even some of the very wealthy individuals who have recently trumpeted their willingness to pay more have participated in schemes to avoid substantial amounts of tax in the past (all legitimate of course).
The concept of what constitutes a limit to tax is not fixed. The economy is not a physical system governed by immutable laws.
For example, in the 19th century, and indeed up until the Second World War, government spending as a proportion of the economy was very much lower everywhere in the West. Roosevelt’s famous New Deal of the 1930s, designed to lift America out of depression, was very modest by the standards of today. But it was vitriolically denounced by many as being almost tantamount to Communism.
All this changed during the war itself. Our national survival in the UK was at stake, and wealthy individuals bore with stoicism tax rates of 98 per cent, with some parts of company profits attracting a 100 per cent rate. For a few short years after the war, high tax was tolerated. This enabled the Labour government of Clem Attlee to both set up the welfare state and repay large amounts of outstanding government debt.
But it is hard to imagine any government being able to conjure up similar sentiments today.
Perverse incentives
Indeed, we can see snippets of what bodies such as HMRC euphemistically describe as “behavioural change”. A tax is brought in, but this incentivises a change of behaviour so that the yield is lower, often considerably so, than it would have been without the change.
Before the election, for example, Labour made much of the pledge to levy VAT on private school fees. This was intended to raise £1.5bn. However, far more parents moved their children to the state sector than anticipated. The final assessment is not yet in, but it might have even cost the taxpayer money.
Last week, a report was published by Dan Neidle, a former member of the Scottish government’s Tax Advisory Group, on the 48p levied by the SNP government on high earners. He estimates that the change in behaviour was such that tax revenues have actually fallen by £22m.
It might well be possible in the current circumstances, where there are so many obvious and pressing economic and social problems, to persuade many to pay more tax provided that they felt their money was being well spent.
This is where the public sector lets itself down. There are good reasons why productivity in the public sector will never grow as rapidly as in the private. But it cannot be stated too often that the estimates of the Office of National Statistics (ONS) show that there has been no overall growth in public sector productivity since 1997.
Decades of no gains in overall efficiency is hardly an inducement to taxpayers to hand over yet more money to the public sector.
The message for a progressive government, such as Andy Burnham wants to lead, is to make the public sector more efficient. That way, a store of goodwill might be built up and higher taxes, if not actively welcomed, paid with good grace.
Paul Ormerod is an Honorary Professor at the Alliance Business School at the University of Manchester. You can follow him on Instagram @profpaulormerod