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Taxes, growth and right-wing ideology

No one would ever accuse Jacob Rees-Mogg of being up to date. But that applies as much to the Tory backbencher’s politics as his Edwardian dress sense.

Polling evidence suggests the British public are unambiguously ready, for the first time in a decade, to pay more tax to fund better public services. The most recent British Social Attitudes survey shows a larger proportion of the public now favour an increase in taxes to pay for better services than the proportion who feel that taxes and spending should be kept where they are.

A specific YouGov poll on the NHS suggested that 66 per cent of the public would be prepared to pay more in income tax to ease the pressure on health. And that even apparently includes a majority of Conservative voters. But Rees-Mogg seemed unaware of all that evidence yesterday, as he preached from the traditional right-wing gospel of tax cuts.

“This country is as highly taxed as a percentage of GDP as it has been since the early 1970s, late 1960s,” he told LBC. “I don’t think the Conservative party is here to increase taxes. Philip Hammond seems to think otherwise but he hasn’t yet presented a budget and he may find there is not a lot of support for tax increases.”

And then came some economic theorising.

“I think you make money available to the NHS by growing the economy and I think you grow the economy by lower tax rates. I think you stifle the economy by higher tax rates.”

Let’s unpack this. Is Rees-Mogg right that taxes are now very high by historical standards? Not really. The share of national income collected in tax receipts will be around 37 per cent this year. Back in 1981 when a 12-year-old Rees-Mogg was threatening to sue the Today programme the tax share was up at 41 per cent.

A larger share of national income was also being taken in the “early 1970s, late 1960s”.

It’s true that the tax share is considerably higher today than the trough of 31 per cent it scraped in 1994 under John Major. But that was a previous time when public services were almost universally considered to be grossly underfunded. Right-wingers like Rees-Mogg are fond of claiming that taxes can be unsustainably high. But they can also be unsustainably low.

The tax take today as a share of GDP is higher than it was a decade ago, before the financial crisis. But that’s largely driven by demographic factors. Health spending is up as the age profile of the population has matured and more people inevitably require care. State pension pay outs have also increased as the pensioner population has grown. The rest of the public sector has suffered an enormous squeeze under the coalition and now the Conservatives.

What about boosting growth through lower taxes? Well, we have some evidence to refer to here. The main rate of corporation tax has been slashed from 28 per cent to 19 per cent over the past eight years. Yet the recovery of business investment has been abnormally weak relative to the wake of other recessions.

The income tax threshold has also been steadily raised. While consumer spending has been reasonably robust, it has certainly not been sufficient to deliver strong wage or GDP per capita growth. This has been the weakest recovery from a recession on modern record.

As for growing the economy in future, there is not a single credible economic forecast showing that Brexit – of which Rees-Mogg is a fervent supporter – will do anything but damage the UK economy. Slower growth will hit the public finances, making less money available from tax receipts for the NHS, not more.

Finally, do higher tax rates stifle growth? The latest data from the International Monetary Fund shows that of 39 advanced economies 25 had higher tax shares than the UK in 2017, among them France (54 per cent), Norway (54 per cent), Finland (52 per cent), Sweden (49 per cent), Germany (45 per cent) and Canada (39 per cent).

Did these relatively high tax countries grow far more slowly than the UK since the millennium? Not at all.

And average annual GDP growth rates in Canada (2 per cent) and Sweden (2.2 per cent) have actually been higher than in the UK (1.7 per cent). Serious economists who have looked at even larger historical datasets find no clear association between lower taxes and higher growth.

There are many reasons why a country can fail to deliver for its people economically. Excessive taxation is probably one of them. But the obsession with which the likes of Rees-Mogg make the case for lower taxes – lower at all costs – reflects more about their own ideological preferences than anything in the available economic evidence.


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