Sources of additional tax revenue

Given the pressures on public spending, governments at UK and Scottish levels should want to identify some additional tax revenues. A recent IPPR report  makes a number of suggestions as to areas they might want to consider.

They give three reasons for considering additional revenues:

• More measures to cut the fiscal deficit will be required between 2015 and 2020, and if the 80:20 ratio of spending cuts to tax increases that has applied in the current parliament is going to be maintained then there will have to be some discretionary tax increases.
  
• All political parties want to reduce some taxes. For example, both the Conservatives and the Liberal Democrats are likely to pledge to increase the personal tax allowance from £10,000 to £12,500 – which means other tax increases will be required to offset this cut.
  
• There are long-term demographic pressures on public spending. If we want to retain current levels of provision of health and social care for older people, revenues will have to increase to pay for them. The alternative is a significant rundown in the quality of public services in the UK in coming decades.

In Scotland, all three reasons apply irrespective of the outcome of this year’s independence referendum.

There are no easy solutions to be found in other countries. Their comparison of tax systems across OECD countries shows that the UK is a fairly average country when it comes to taxation. There are many other economically successful countries – in particular in Scandinavia – that have a significantly higher ratio of tax to GDP, but there are also countries with a lower ratio. Even in Scotland, there is little political appetite for Scandinavian levels of taxation as the White Paper shows.

The report does give some pointers as to where to start, particularly with the aim of increasing revenues in a progressive way and without causing economic damage. The report assesses the potential of three broad classes of new tax revenue:

• less unpopular taxes, such as the frequently mentioned 'mansion tax'
• mainstream taxes, such as changes to VAT or national insurance
• entirely new taxes, such as taxes on wealth, land or financial transactions.

Thoughts on this issue are not restricted to the political left. Tory commentator Danny Finkelstein, recently made the case for a new ‘NHS tax’ in article in The Times. An attempt to link taxes with the most popular public service.

One solution unlikely to be favored by Finkelstein is taxing high incomes and wealth. Last Wednesday was dubbed ‘Fat-Cat Wednesday’ by the High Pay Centre because Britain’s top bosses have already made more money in 2014 than the average UK worker earns in an entire year. FTSE 100 Chief Executives are paid an average £4.3 million, equivalent to hourly pay of well over £1,000. Executive pay has increased by 74% over the past decade, while wages for ordinary workers have remained flat.

I am tempted to say that there is more than one way of skinning a cat – but that would be tasteless!