According to a story in today’s Daily Telegraph, “Almost one million of the lowest-paid workers will no longer have to pay income tax, under plans to be set out in George Osborne’s first Budget today. The Chancellor will claim that the Coalition is being ‘fair and progressive’ and its Budget will not hit the poor disproportionately. The package of measures is expected to be the most draconian in 30 years. The Chancellor will say that ‘tough action’ – raising taxes and cutting spending – is ‘unavoidable’ if the £155 billion deficit is to be brought under control.” Despite appearances, the bad news here is in the first sentence.
The impulse behind this tax change is understandable. After more than a decade in the political wilderness, a Conservative party at the head of a shaky parliamentary coalition and facing a dismal budget situation wants to defuse criticism from the left by coupling austerity measures with some heart-warming progressivism. Benefits must be cut, which seems to harm the poor, so a tax break for low-income workers looks fair. The government may even think it is fair. But it is both unfair and dangerous.
For whatever public relations virtues of this move, it contributes to an increasingly dangerous political calculus in which large numbers of voters can try to vote themselves public benefits at little cost, while another large group are big net losers from almost every major social program. As MLI’s Managing Director Brian Lee Crowley and his co-authors noted in The Canadian Century, the American tax system is now badly skewed in this regard, with at least 80 per cent of American households paying a smaller share of the tax burden than their share of national income and thus having something material to lose if spending is brought under control. The results of this perverse incentive structure in the U.S. are becoming painfully obvious.
Making the same problem worse in Britain now is singularly ill-timed because the kind of drastic budgetary reform the Tories contemplate requires a strong sense that we are all in this together. The actual effect of the sort of tax changes the Telegraph describes, however, is to ensure that Britons are not all in it together, psychologically, economically and politically. It is something governments need to avoid… especially if they want deficits brought under control.
