Wave the jazz hands and hope for the best

Politicians hope that voters are clueless about tax, writes Tim Harford

‘Ed Miliband … put the wealthy on notice that a future Labour government would squeeze the rich with a £2bn tax on expensive homes to fund a revival of the 10p starting rate of income tax, axed by Gordon Brown’
FT.com, February 14

A Valentine’s day massacre for the rich, eh?

More like an ill-judged romance with an old flame. Mr Miliband’s 10p proposal repeats an error committed by Denis Healey in 1978, Norman Lamont in 1992 and Gordon Brown in 1999. It’s a pretty basic howler but what’s more interesting is that politicians are so determined to learn nothing from history.

First tell me why it’s a bad idea.

My colleague John Kay explained this elegantly on Wednesday, but in a nutshell there are two problems. One is that many people earning low incomes are not poor; they are, for instance, the second earner in a two-income household. It’s the benefits system, not the tax system, that is designed to take this into account. Even more fundamentally – it’s a matter of simple arithmetic – it is always more advantageous to people with lower incomes to increase the personal allowance, rather than introduce a new low-rate tax band. Raising the personal allowance is simpler and more progressive than introducing a 10p tax band, while the surest way to reach the needy is through benefits reform.

So why is the 10p tax band so hard to kill?

It’s possible that Mr Miliband hasn’t given a moment’s thought to how taxes actually work. It’s more likely that Mr Miliband reckons voters haven’t given a moment’s thought to how taxes actually work. And Mr Miliband may be right. The way tax policy is conducted in this country is farcical – a point made in an exasperated policy brief issued this week by the Institute for Fiscal Studies.

Ah, the IFS! The nation’s favourite Budget-kibitzers.

I wonder if the IFS isn’t fed up of playing that role. Everybody likes to see it pick apart the details of the latest Budget or Autumn Statement. But when it published a grand treatise on tax reform, “Tax by Design”, a few years ago, nobody cared. This is a symptom of a serious political malaise. The tax system should be just that – a system, with interlocking parts working together to achieve an overall goal. Instead the tax system is a labyrinth for ordinary users, a money factory for the tax advice industry and a stocking full of miscellaneous goodies for successive chancellors of the exchequer. Twice a year, whoever is chancellor has to produce some tempting giveaways, all calculated for their political effect, while desperately clawing back the revenue as he hopes nobody is looking.

So what’s the solution?

Politically, I have no idea. But economically, it’s easy to point out some basic features of a sensible tax system. Some are obvious: keep it simple, for instance, and avoid perverse incentives. But what is less obvious is the tax system needs to be considered in its entirety. At the moment each change to taxation is served up by a hopeful chancellor, jazz hands waving as he waits for applause. The change is then picked apart as though the rest of the tax system did not exist.

For example?

Take the withdrawal of child benefit from households with a high earner. The measure was messy and has been costly to prosperous, fecund people of a certain age while leaving many other prosperous people untouched. The changes were justified on the grounds that they were progressive, and indeed they were. But whether an individual tax is progressive or not is not the point: the question is whether the system as a whole is progressive. We want – and can have – a tax system which is fair, provides reasonable incentives (discouraging smoking and carbon emissions while encouraging education and pension saving) and yet is not too Byzantine. But to make each individual tax meet these standards in isolation is unnecessary, absurd and impossible.

And yet having each tax examined in isolation is the inevitable consequence of chancellor’s twice-yearly party pieces.

Yes. Intriguingly politicians do now try to link one tax with another – as Mr Miliband has done, promising to pay for his unwise 10p tax band with a tax on expensive property. But these pairings are arbitrary and cosmetic. Assembling a coherent system seems to be beyond the wit of today’s politicians, and as long as we all treat each Budget as a bullet-point list of grabs and giveaways, we will deserve the scrappy tax system we have.

Also published at ft.com.