By Adam Peggs
Much has been said in recent months about the dangers of raising taxes in a recession or at the beginning of an economic recovery. This is based on a longstanding and sound analysis of how the economy works. When a recession happens, private spending, both from companies and individuals, drops off. As the economy falls, people fearful of hard times choose to save rather than spend, cutting consumer spending. Businesses, wary of low returns in this context, choose to hold off on investments.
In this situation, the government should step in, borrow and spend because no one else will. This can significantly dampen the impact of a recession and stimulate an economic recovery. This is why most economists and the bulk of contemporary economic thinking back borrowing and spending instead. Raising taxes to reduce the deficit and pay off debts during the recovery takes money out of the economy, which could have been spent on job creation and boosting demand. Because of this, tax rises can be counterproductive.
In broad-brush terms, this is all true. However, when it comes to tax rises, some of the realities are more complex. Raising tax to reduce public debts and ‘pay for coronavirus’ is one thing, raising taxes to reduce economic inequality and meet social needs is another. There is also the question of what taxes are being raised, what kinds of activity (or lack of) are being taxed and the other side of the government’s balance sheet – public spending.
For example, raising taxes on speculation, such as buying housing or land just to watch the price rise, may well be a good thing. Given the climate crisis, a similar logic applies to polluting economic activities. And taxing ‘idle’ wealth that isn’t being put to use in the economy can be a way of pushing asset-owners to invest and create jobs.
As Carsten Jung, Senior Economist at IPPR writes, “We need to move away from a binary ‘raise taxes now – YES or NO’ framing. The fact is: some taxes like corporation tax & CGT [Capital Gains Tax] can be raised without stifling growth much – especially if in the context of a big stimulus. Bigger tax increases can follow later, but we can start now.”
This makes a lot of sense. While across the board tax rises would stifle a recovery, smaller and targeted tax rises would not have the same kind of effects. Who or what is being taxed and by how much is a significant question here. Raising some taxes, like Capital Gains Tax, Inheritance Tax, Corporation Tax and Income Taxes on the very highest incomes does not pose the same risks as raising others, like Council Tax and VAT (which tend to impact lower earners more) and Income Tax and National Insurance for those on lower and middle incomes.
One aspect of this that some mainstream economists miss is that taxing economic activities to spend on social needs is worthwhile on social grounds and that this is necessary to build a society with better priorities. This would certainly apply to spending on healthcare, education, public housing, broadband infrastructure, libraries and other local services and poverty alleviation.
Next, two points that are perhaps even more important. One, tax rises in some areas do not necessitate an increase in the overall tax burden. And two, increases in the overall tax burden can be offset by higher spending. The more significant variable is the level of borrowing. Reducing borrowing will reduce demand and increasing borrowing will do the opposite – stimulating the economy.
There are two obvious ways to go forward with tax rises without undermining an economic recovery. One would be to either offset any tax rises with equivalent tax rebates. The other would be to increase public spending by at least as much as any tax rises, which would boost demand through increasing benefits or creating jobs directly. It is also entirely possible to do both.
What would this look like? On tax, you might introduce rebates for council tax payments for those on low incomes or National Insurance rebates targeted at the same groups (National Insurance is particularly regressive and starts at a lower threshold than Income Tax). This would give people on lower incomes more capacity to spend – and they are more likely to spend more of it than those on higher incomes. Income Tax rebates for those on low or relatively low incomes would also work similarly.
Given the urgency of addressing the climate emergency and the state of the public realm, increased public spending makes even more sense. Investment in a Green New Deal would create vast numbers of secure and well-paid jobs for the long-term. Likewise, a substantial programme of investment in new council housing would create large numbers of jobs by providing secure, genuinely affordable housing. When you look across our tattered welfare state, from our paltry welfare system to an overburdened NHS and education system, there is no shortage of areas where extra funding would make a significant positive difference.
As a consequence, I would argue that raising taxes on companies and the better off and offsetting this with large levels of public investment is a better way forward. Starting to reverse cuts to Corporation Tax, raising Capital Gains Tax to the level of Income Tax, raising Inheritance Tax (or replacing it with a Lifetime Gifts Tax) are all policies which could begin to be implemented now. The same applies to the establishing an Annual Net Wealth Tax and raising Income Tax on the best off 5%. This would not be necessary to ensure that we can have high-quality public services, we can afford that anyway, but it would work as a step toward a fairer and more progressive tax system and a society that is less unequal.
With the budget fast approaching, calls for tax rises to be opposed or deferred feel misplaced. Tax rises needn’t hinder the recovery if they are offset by temporary or permanent tax cuts elsewhere or by the increased public spending many of our services desperately need. We urgently need to respond to the climate emergency – and the government can start spending this money now.
It is true that it will take much more than tax rises to even begin to address the vast levels of injustice and inequality we are confronted with. However, this would at least represent a necessary step in a better direction.
Adam Peggs is a writer and activist based in Hackney, London.
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