Fiscal crisis won’t go away until taxes and benefits balance

IT is good news that George Osborne and David Cameron have decided not to impose crippling tax hikes on property owners. There will be neither a mansion tax nor a wealth tax, while council tax will be frozen and – most importantly – homes won’t be revalued.

This latter move would have delivered huge tax hikes to hundreds of thousands of Londoners and residents of the commuter belt.

UK property is already highly taxed – more heavily than in any other OECD country.

Taxing stocks of wealth – rather than income flows – is unfair on the cash poor but asset rich, especially pensioners, and undermines property rights.

It would also have damaged the UK’s competitiveness by making Britain a less hospitable place for CEOs and entrepreneurs, thus reducing their interest in investing and creating jobs here. Taxes aimed at the “rich” often end up hitting the poor hardest, especially when they lead to a reduction in opportunity.

Of course, property prices are overvalued – but the way to tackle this is to build more of the right kind of homes in the right places.

I regularly criticise the government for insufficiently pro-growth and pro-enterprise policies – but yesterday’s announcement was positive.

The real fiscal problem is not that the government raises too little tax – it is that too many relatively wealthy people simultaneously pay a lot of tax and receive a lot of benefits and services from the state.

Ideally, everybody would pay less tax and those who could afford it would receive even less. The poor, of course, must be given an effective hand up.

The official figures are analysed in a paper out today by Ryan Bourne of the Centre for Policy Studies.

In 2010/11, 53.4 per cent of households received more in benefits in cash and services in kind than they paid in taxes – compared to 43.1 per cent in 1979 and 43.8 per cent in 2000/01. Around 3m more households took out more than they put in in 2010/11 than 10 years earlier.

This is partly due to an increase in pensioners; and the whole purpose of having a safety net is that in hard times more people will be helped out. But clearly something else more problematic is happening.

Take non-retired households: 39.6 per cent of these received more than they paid in taxes in 2010/11 compared to 31.7 per cent in 1979 and 29.0 per cent in 2000/01.

The share of such families receiving a cash benefit other than child benefit rose from 40.3 per cent in 2000/01 to 44.6 per cent in 2010/11.

The crucial shift is that middle-income households have moved from being net contributors to the state to net recipients.

Twenty years ago, the middle quintile faced a net effective tax rate of 8.2 per cent; by 2010/11, their net effective rate was -20.4 per cent.

This group used to pay £1,673 more than it received but now receives £4,589 more in benefits and services than it paid in taxation. The fourth quintile has also seen a big increase in benefits and services, though it still pays more in than it takes out. This makes no sense either.

The highest quintile paid £20,125 more in taxes than received in benefits and services.

It was Frederic Bastiat, the French economist, who said that “the state is that great fiction by which everyone tries to live at the expense of everyone else.”

Until we wake up to this problem, the UK’s fiscal crisis will never really go away.

allister.heath@cityam.com
Follow me on Twitter: @allisterheath

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