Are tax cuts the cure for the economy?

Ed Balls, back from his mysterious period of absence, confirmed Labour’s right-ward drift on economy on the Andrew Marr program this morning. He called for a 3p cut in income tax and a slashing of Value Added Tax. On the second measure we can agree, VAT is a tax hammers the poor and economically cuts consumption to the bone. Although nominally it doesn’t affect prices on food and clothing etc it actually does because increased production and transportation costs etc are passed onto the consumer.

Income tax is however a different matter. Cutting income tax is a favourite hobby of the right because it cuts state revenue and therefore acts as a bar on the role of the state. It also disproportionately benefits the rich because they are unaffected by service cuts and can still trouser the tax cut. Meanwhile, for middle and low income earners, the tax cut is gobbled-up by service cuts, increased prices, etc and they see little to no benefit. What is the point, for example, of taking a families tax credits away but cutting their income tax? Its therefore more a placebo than a sound stimulus – something designed to make people feel better off when they actually aren’t. Its an expensive placebo at that as well.

Furthermore, as unemployment rises through the roof the actual number of those paying income tax is decreasing – and the number who will benefit from it falls further. It’s no accident Balls is now in support of Conservative back-bench right-wingers. A cut in income tax would actually accelerate the austerity agenda. It would also be a sly way of quashing the 50p rate – something that Balls nominally is supposed to support.

One of Labour’s great failings in government was the horribly low amount of tax revenues it collected. It thought aping the Conservatives low-tax agenda would be the route to paradise and it turned out to be the road to hell. Sadly, all Mr Balls has confirmed today is that rather than offering a real alternative his economic policies are determined to reinforce the status quo – a tragedy for Labour for sure and one for the country too which needs a real alternative.

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About darrellgoodliffe

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2 responses to “Are tax cuts the cure for the economy?”

  1. Matt Barker (@pigovian) says :

    Hi Darrell that’s a very well written argument behind not cutting income tax, whereas before I may have been sympathetic to the idea of cutting income tax and increasing wealth and pollution/sin taxes, but now I think TEQs are a magic bullet. See http://www.teqs.net.

    Regarding VAT, say a supermarket pays VAT on standard rated inputs like fuel, but then does not collect VAT on food as it’s zero rated, it would get a refund from HMRC for input VAT paid so it may not always be the case therefore that increasing VAT increases the cost of zero rated food, say. I say this as I have a bookkeeping qualification and am studying ACCA accounting. If an unregistered haulier billed the supermarket for delivery, they would have to pass on the cost of the VAT as they could not reclaim it on the input.

    In the absence of TEQs, one could use higher fuel taxes and then invest in public transport, electric hybrid buses and possibly cars for those that needed them (more car clubs perhaps?). People who can drive can choose to or not, whereas those that cannot shoudl not have to suffer for those who can by sitting in traffic jams on the bus or trying to walk next to busy roads. I would very much like to hear your thoughts.

    Finally keep pushing the Labour leaders and execs hard to listen to grassroots members like yourself, and unions. Best of luck

    Like

    • darrellgoodliffe says :

      Hiya Matt,

      My concern about sin taxs is that they tend to hit the poor most because the poor tend to ‘sin’ more. Ie, they tend to smoke, they tend to drink. Similarly, I think we have to be careful with petrol because again poor people tend to be reliant on car etc, petrol companies tend to pass tax increases even on them straight onto the pump. This is why solid redistributative tax policy needs a supporting prices and incomes policy backing it up in my eyes.

      TEQ’s look interesting and I will certainly look at them more. I would certainly prefer them to simply slapping higher fuel taxes on I think. We have to hardwire social equality into the green agenda I think to build the necessary union between green and red politics.

      Thank you, I certainly will do 🙂

      Like

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