Christopher Chope OBE MP argues
that in Britain’s current economic
climate, tax cuts are essential...
The second quarter of 2008 showed no growth in the UK economy for the first time since 1992. The current quarter confirms that the agony of recession is upon us. No one knows how long or deep this recession will be. What we do know is that almost every family is faced with the cost of living rising faster than family income and that access to borrowing is more restricted and more expensive. Responsible families are having to cut out luxuries to concentrate on essential spending and expect Government to behave in similarly prudent manner.
This background gives the Conservatives a great opportunity to free themselves from the hook of ‘business as usual’ in relation to tax and spend. A year ago I asked George Osborne how his commitment to ‘sharing the proceeds of growth’ between public services and tax cuts would fit in with his pledge to match Labour’s 2% per annum planned growth in public spending to 2011 would work. In particular, I enquired as to what would happen if the growth in the economy was lower than the 2% guaranteed for public expenditure. George’s response was that no recent Conservative Government had ever been able to reduce annual growth in public expenditure below 2% and that in the event of lower growth, tax cuts would have to be postponed.
George Osborne now needs to think again. In the present economic climate tax cuts are essential. As Michael Forsyth, the Chairman of last year’s Tory Tax Commission has reminded us, ‘The higher the burden of taxation, the less opportunity there is for growth. To get further growth the State has to take less from people in tax’.
A recent editorial in The Sunday Telegraph summed it up succinctly. ‘Tax cuts will be essential to getting the economy out of the doldrums. The evidence is now overwhelming: stagnant economies revive when Governments reduce the burden of taxation’.
In the latest Conservative Way Forward pamphlet, Matthew Elliott, Matthew Sinclair and Corin Taylor show how cutting Corporation Tax would boost revenue. It would also help retain UK based corporates with overseas subsidiaries. Unfortunately the UK’s uncompetitive corporate tax regime is no longer a secret. In one week in August, Henderson Group, one of the City’s big players with £47 billion of assets under management, and engineering company Charter, announced that they were moving their corporate headquarters to Ireland. Their announcements followed hard on the heels of the pharmaceutical group, Shire, and United Business Media, both of whom relocated to Ireland earlier in the year. Ireland is not the only destination.
Regus, the world’s largest provider of serviced office space, announced in August that it was moving its headquarters to Luxembourg. Many other companies are thinking of similar moves. In response, George Osborne’s policy of reducing the main corporation tax rate from 28% to 25% together with a permanent simplification of the tax system is helpful. But the market suggests that it may not yet be enough to persuade major corporates that an incoming Conservative Government would restore the UK’s competitive advantage in corporate tax.
The case for lower personal taxes is equally compelling and urgent and it should not be limited to only family taxes and inheritance taxes but across the board. Individuals domiciled in the UK do not have the luxury of being able to opt out of the UK tax regime but they are increasingly sensitive to the high rates of personal taxation. Prior to amending the Finance Bill in July, the personal allowance for a basic rate taxpayer was only worth £5,435. This meant that an individual working forty hours a week on the minimum wage was being required to pay a significant sum in income tax. Even the one off increase in the personal allowance by £600, introduced as a sticking plaster to mitigate the fall out of 5.3 million households being worse off a result of the abolition of the 10p rate, still means that the minimum wage is not free of income tax.
If there is a moral case for a minimum wage, it should surely be based upon the fact that the State regards the income received as being the minimum upon which the individual can survive. This means that the State should not then be imposing income tax on that minimum although it would not be unreasonable that minimum wage should be subject to National Insurance and pension contributions for the direct benefit of that individual.
With effect from October this year the minimum wage for all aged over twenty one rises to £5.73 per hour. This equates to £11,918 per annum for a forty hour week. The gap between the temporarily enhanced Labour personal allowance of £6,035 and the annual minimum wage is the morally indefensible income tax gap of £5,883.
David Cameron has pledged to be ‘as radical a social reformer as Mrs Thatcher was an economic reformer’. What better place to start radical social reform than by taking all those on the minimum wage out of income tax so that their earnings can be spent on themselves and their families and not grabbed by the State. What better incentive for people to work and for work to pay? What better way of meeting David Cameron’s goal of promoting individual freedom and responsibility than by allowing people to keep more of their own money to spend as they choose?
If Barack Obama, a Democrat!, can promise tax cuts to 95% of US tax payers, what is the equivalent promise to be made by UK Conservatives? My suggestion is that it be a guarantee that the minimum wage up to forty hours per week would be free of income tax.
A year ago, no one would have believed that Gordon Brown’s honeymoon in popularity would be replaced by a Conservative opinion poll lead of about twenty points. The manner and speed with which Brown’s chickens have come home to roost is a vindication of all of us who considered Labour’s economic recipe of high tax, high debt and low productivity to be unsustainable.
What Conservatives need to do now is harness the new public appetite for tax cuts and reinforce the public disengagement with Labour by offering a radical alternative agenda which will transform for the better life for millions of hard working families.
Christopher Chope OBE MP is Member of Parliament for Christchurch and Chairman of Conservative Way Forward