Do we need to raise tax?
Ireland has just announced an emergency budget, with significant tax increases for individuals. Roger Bootle, Deloitte's economic adviser, makes it clear that the UK will need net fiscal tightening in the years ahead - but that taxes should not be raised now.
The Chancellor did of course announce a significant package of tax increases and spending cuts in the November 2008 Pre Budget Report. The main elements are reduced personal allowances for people earning over £100,000; a new 45% tax rate for those earning over £150,000; spending cuts of £5 billion pa from 2010 and an extra ½% national insurance levy for employers and people.
Where could the Chancellor look for further tax rises? Perhaps he might consider an increase in the VAT rate, to 18.5%, which of course he considered and rejected last autumn. This would raise over £5 billion and would cost someone on average earnings of £25,000 about £1 per week. Of course it would be necessary to compensate those on very low incomes by increasing credits and benefits.
Another option - once it is clear that credit is flowing freely - could be to ask businesses to pay tax a little earlier. The main months for corporation tax payments are July, October, January and April. Simply moving the April payment into March would bring forward tax revenue on a one-off basis, without a major cost for companies.
Yet another option could be to increase the basic rate of income tax by 1%, to 21%. This would raise over £3 billion and would cost someone earning £25,000 a further £3.50 per week - more than the VAT increase.
Putting up the top rate of tax doesn't seem to raise as much money. The new 45% rate at £150,000 is estimated by the Treasury to raise only £670 million in the first year - although the second year will raise more (the Treasury hasn't given us their figures). Could an increase to 50% be considered?
Choosing what options to select involves political choices rather than obviously economic decisions. The economic decisions concern the amount of the fiscal tightening.
