In the City
Taxation blues
Nicholas Davenport
Years before the war my old friend Colin Clark, then University Lecturer in Statistics at Cambridge, wrote that if the Government took away in tax more than 25 per cent of a man's earnings there would be trouble. People would not work so hard, they would try to evade tax, they would fiddle, they would seek cushy jobs with the public service, and the end result would be a decline in output, a rise in prices and inflation. He was right. High taxation is always inflationary. But no one listened to him and he went off to Australia where he became Director of the Queensland Bureau of Industry and a great expert in the economics of agriculture and growth. I was glad to see him back home recently, trying hard not to say 'I told you so.'
Today the Government takes away 35 per cent of your income up to £5,000, 40 per cent from that to £5,500, 45 per cent from that to £6,500, 50 per cent from that to £7,500, 55 per cent from that to £8,500, 60 per cent from that to £10,000, 65 per cent from that to £12,000, 70 per cent from that to £15,000, 75 per cent from that to £20,000 and 83 per cent over that (90 per cent if it is investment income). At the high points you say to yourself I am going to emigrate, if my wife agrees, to some country where I am paid better, where I am allowed to keep more of my hard-won earnings and where enterprise is rewardly more justly. And that feeling applies not only to business managers in the £10,000 range, who will be offered double in France or America for a like job but to the upper working class.
I met last summer a rich member of the upper working class who was engaged as a sub-contractor in the so-called 'lump' in the building trade. He was fitting the curtain rods and appliances in expensive houses for a big contractor. He did not tell me what he was earning but I guessed it to be well over £10,000 a year. I asked where he was living and he said near Heathrow for convenience as he had to fly to so many jobs. Socialists should give such an enterprising man their blessing, for he was carrying out the wider distribution of wealth which is part of their creed, but in so far that he was evading tax he would now be caught by the stricter provisions of the Finance Act of 1976 which come into full effect this April. The certificates which entitle a sub-contractor to be paid without the 35 per cent tax deduction are now issued only in strictly controlled circumstances.
All this has necessitated a heavy extra load of work for the Inland Revenue office which has had of course to take on more and more staff to deal with the growing complexity, if not absurdity, of the tax system and the increasing numbers of taxpayers coming into the higher tax brackets and the investment income surcharge over £1,500. The cost of their office rose last year from £250 million to £354 million and the numbers employed by 6,000 to over 18,000. They are one of the big employers in the country. It is amazing that the over-all cost of tax collection is still just under 2 per cent—but over 2 per cent for the cost of collecting the capital gains tax which allows no remission, as it should do, for the depreciation in the value of the money gained.
The report of the Commissioners of Inland Revenue for the year ended March 1976, from which I am culling all this fascinating information, is the most depressing document I have read for a long time. It reveals that the yield of income tax—the millstone which weighs upon and slows down our work—has trebled since 1970-71 —from £5,731 million to £17,000 million in 1976-77. Income tax now accounts for 53 per cent of the total tax revenue. Corporation tax, net of relief under the Finance Act of 1965, accounts for only 8 per cent, customs and excise motor vehicle duties for 35 per cent. It is obvious that too large a proportion of the tax burden is falling on the back of the individual worker.
The CBI have therefore urged the Chancellor in their budget recommendations to make a major reduction in personal taxation, They propose that the basic rate should be reduced to 33 per cent and that the threshold for higher tax rates should be raised from £5,000 to £8,000. The top rate on earned income in their view should be lowered from 83 per cent to 60 per cent, phasing this through the use of a temporary levy on taxable incomes over £20,000 which would be washed up over two years. Their proposal would mean a 5 per cent increase in take-home pay for a family earning £5,000 to £8,000—rather more for the higher paid —and this would surely earn the support of the upper working class. Indeed, the TUC and the CBI are agreed upon urging the Chancellor to cut about £1,000 to £2,000 million off direct taxation. My learned friend Peter Jay said in The Times, when last it was printed, that 'there does not look like being much above £1,000 million of room for tax cuts within the £8,700 million PSBQ ceiling pledged to the 1M F.' But I am sure that Mr Healey will find that the Treasury has been getting its figures wrong again on the cautious side, and will do his best to please both TUC and CBI. March 29th will, I hope, be the day of miracle.
It appears that the Chancellor will be repeating the action he took in his previous budget when he made certain income tax concessions conditional on the conclusion of a satisfactory pay restraint agreement with the TUC. Then the Finance Bill was amended at report stage to give higher rate tax thresholds up to the 60 per cent bracket which caused the Inland Revenue staff to work two million hours of overtime to ensure that the twenty-five million people affected would receive their rebates by the end of July. Let us pray that they will be burning the midnight oil again this summer.
The harsh report of the Inland Revenue which lies before me says that 80 per cent of the increased yield of all taxes comes from income tax and that this is due partly to the higher tax ' rates, which took effect for 1975-76, but mainly to the rise in moneY incomes and the 'fiscal drag' in a progressive tax system, I can hear the Chancellor saying that it was all due to you silly billies insisting on your wage explosion in 1974-75. When Mr Jack Jones 'demands a wider distribution of wealth I would ask him to read this horrifying Inland Revenue report and study how far the distribution of wealth has already gone. In the last five years fiv,e million extra workers who had never paid tax have been trapped in the Inland Revenue books because of their increased wealth' The number who have been dragged int° higher tax brackets in the past three years has quadrupled. The industrial equity market on the Stock Exchange has been edging upwards—the index is now 406—in anticipation of the tax reliefs to come, but the more cautious In' vestor should, I think, wait-and see.
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