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What is the Chancellor to do?

Faced with a huge deficit and the need to act quickly, what should the Chancellor do? Of course we do not like the present tax system, which is a major cause of all the present problems. Cuts are part of the solution. But there is no gain if those who lose their jobs then spend months unproductively on the dole, and it could – probably will – lead to social unrest. The real problem, the one that has brought this dire situation about, is that we have taxed that which we ought not to have taxed, and left untaxed that which we ought to have taxed. But even within the limitations of the present tax system, there are things a Chancellor can do to help, and things that will make matters worse.

What he most definitely should not do is raise VAT. It is as much of a Jobs Tax as National Insurance, and can only push people out of work, which will also add to the government’s benefit bill. It will also mean that the government will have to put up benefits rates as these are linked to retail prices.

We suggest that the Chancellor begins with a bit of a tax cut, by raising thresholds for Income Tax and National Insurance to the equivalent of working a 40-hour week at the national minimum wage, on the principle that people earning subsistence wages should not have to pay tax. This was, after all, a Liberal Democrat manifesto committment, and it needs to be implemented as quickly as possible.

This of course, leaves the Chancellor short of cash, so what should he do? We do not support Income Tax, of course, but it is less harmful to set a higher rate of tax with a higher threshold, so we would raise the standard rate of income tax to compensate for the higher threshold. Paradoxically, by raising the threshold, more people would work, leading to a reduced benefits bill, more production and more tax income for the government. A virtuous circle.

But for the present, the really big immediate opportunity for tax rises that would not harm the economy is through raising property taxes. We do not like the Council Tax, as it is the wrong sort of property tax, and it favours the top end of the market – the rate on band H properties is only three times that paid on band A, even though the top band properties are worth six times band A. By any standard, that is unfair and regressive, so there is scope for increasing this differential factor, gradually or in one go if necessary. This would be far less damaging than increasing Capital Gains Tax

Business rates could also go up, but the difficulty here is that upwards-only rent revision clauses prevents tenants from renegotiating, which means that significantly higher business rates could drive firms out of business. A small increase, however, might be feasible, but reform must wait for legislation that declares upward-only rent revision clauses illegal. This now applies to new leases in the Irish Republic, but the Labour government was going to introduce this legislation and then caved in to pressure from property owners.

Longer term, ie within a three-year period, no more, we would of course urge that the Chancellor switches to land value taxation for a substantial proportion of public revenue. This would put the government in a good position to repay debt without harming an economic recovery which will, at best be fragile.

The real question that then has to be asked is whether the landowning interests really have the welfare of the nation at heart? If the minority of the people who actually own Britain are not willing to make sacrifices for the greater good, why should anyone else be expected to?